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Three criteria of bullish and bearish engulfing pattern (Figure 1):
- There must be a pronounced upward or downward trend (even a short-term one) on the market.
- The body of the second candlestick engulfs the body of the previous candlestick (shadows may not be engulfed).
- The second body must be of the opposite color and be white in case of a bullish signal and black in case of a bearish signal.
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Figure 1. Bullish and bearish engulfing pattern
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There is an exception for the third criterion: when the body of the first candlestick is so small that this candlestick is comparable to a doji (or is a doji). I.e. after a durable downward trend a tiny white body is eclipsed by a very large white body. And in case of an upward trend a tiny black body is engulfed by a very large black body of the second following candlestick.
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Figure 2. Example of the pattern
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Factors that strengthen the signal of bullish and bearish engulfing pattern:
The first candlestick has a very small body while the second candlestick has a very large body. The previous trend is weakening and the new trend is gaining momentum.
If the pattern appears after a durable or impetuous trend. If a trend lasts for a long time all potential buyers (sellers) have already entered into positions and no new participants are expected. I.e. the trend will complete. Quick price movement «stretches» the market and make traders lock-in profits, closing positions.
A bigger trading volume corresponds to the second candlestick. This is a sign of the trend’s blow off.
The second candlestick engulfs several bodies.
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Figure 3. Example of the pattern
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