FAP TURBO

Thursday, April 19, 2012

The Engulfing Pattern

Engulfing Patterns

The engulfing pattern is the inverse of the harami pattern with the exception that the candlesticks that make up the pattern cannot be the same color. It is similar to the outside reversal pattern. Like the harami pattern, the engulfing pattern consists of two candlesticks with the first candlestick being a relatively short candlestick with a short real body and the second being a large candlestick with a big real body that engulfs the real body of the first candlestick. The engulfing pattern can be either bearish or bullish, depending on its location on the price chart. In addition, the colors of the candlesticks are significant.

Firstly, the engulfing pattern is a trend reversal pattern and must therefore appear in an existing trend. The pattern is more reliable if it appears at or near a support or resistance line, or a trendline. Secondly, the colors of the candlesticks are important. In an uptrend, the first candlestick in the pattern must be light indicating that it closed higher than its open price. The second, larger candlestick must then be dark, indicating that its close was lower than its opening price. The small real body of the first candlestick indicates a degree of indecision and uncertainty about the uptrend. Then large body of the second candlestick indicates that supply has exceeded demand and that the onset of a down trend is very possible. Conversely, in a down trend, the first candlestick in the pattern must be dark in color indicating that it closed lower than its open price. The second, larger candlestick must then be light, indicating that it closed higher than its opening price. The small real body of the first candlestick indicates a degree of indecision and uncertainty in the down trend and the large body of the second candlestick indicates that demand has exceeded supply and that the onset of an uptrend is very possible. Thirdly, the length of the first candlestick's real body is significant as a smaller real body implies greater indecision and uncertainty. Fourthly, volumes on the second candlestick should be higher than on the first.

This article was taken from http://www.chart-formations.com/candlestick-patterns/engulfing.aspx

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