By: Johnathon Fox
The Bullish and Bearish Engulfing Bar are reversal Price Action signals. This means that engulfing bars can be used to catch potential reversals in the market. Engulfing Bars can be played with or against the trend however they must always be traded from swing points.
For an engulfing bar to be valid it must fully engulf at least one previous bar or candle. This includes all the body and the wick. The engulfing bar can engulf more than one bar as long as it completely engulfs the previous bar.
An example of a valid bearing engulfing bar:
When looking to trade the engulfing bar it is important that they form at swing points. The engulfing bar is not a continuation bar and to play it as such would be dangerous. The best engulfing bars are the bars that stick out like a sore thumb and are very obvious.
Not two engulfing bars are made equal. Just because an engulfing bar has the correct formation does not make it automatically tradeable. Two Main points need to be taken into consideration;
1. Is the engulfing bar with or against the trend,
2. Is the engulfing bar at a key level
Like nearly all Price Actions signals, trading with the obvious trend is the best option when available. That being said engulfing bars are reversals and quite often will form against the trend signalling a possible reversal of momentum.
To increase the chances of the engulfing bar working out favourably it is crucial trades are taken from important levels. When matched with key levels in the market the engulfing bar can be a reliable and powerful Price Action signal.
Example of large and obvious engulfing bars:
Once the trader has worked out how to identify and enter the engulfing bar it is then vital they follow up with education in the following areas:
- Where to trade engulfing bars from in the market
- How to manage the stops on engulfing bars
- What are the best engulfing bars to trade
- How to enter engulfing bars
- How to manage the engulfing bar for maximum profit and minimum risk
- When to take profit
- When not to take a engulfing bar setup
- The best types of market to trade engulfing bars
Armed with the correct knowledge of how to manage engulfing bars correctly traders will have a very powerful Price Action signal in their trading tool box.