Lesson 4 of 6 · 8 min
Engulfing Candles
Step 1
What it is
An engulfing pattern is two candles. The second has a body that completely covers the body of the first, and it moves the other way.
It shows a sharp change of control within one candle. That is useful information, but only some engulfing patterns lead anywhere, and a lot depends on where they form.
Traders use it because it is easy to define and test, which makes it a good pattern for practising rules.
Step 2
See it on a chart
A bullish engulfing candle with volume rising on the second candle.
Illustrative chart with made-up prices and tick volume, built for teaching. It is not real market data and not a trade idea.
Step 3
The exact rules
What must be true before entry
- A clear move before the pattern.
- A second body that fully covers the first.
- More volume on the second candle.
What volume should show
Where to enter
Where the hard stop goes
Where the target goes
What invalidates the idea
- Price closes past both candles.
- The pullback goes through the whole engulfing candle.
When not to take it
- It formed in the middle of a sideways market.
- The candle is so large that 3:1 is not possible.
- Major news is due soon, or you would be trading outside your planned hours.
- You have just taken a loss and feel the need to win it back.
Step 4
Your turn: plan the trade
After a rise, a large down candle has covered the body of the candle before it, on higher volume. Price has made a small pullback. Mark your plan.
This setup is a short. Look at the candles and the volume. Choose a line below, then tap the chart to place it. You can also drag its label or type a price.
Illustrative chart with made-up prices and tick volume, built for teaching. It is not real market data and not a trade idea.
Step 5
The trap: jumping in at the close
A big engulfing candle is exciting, and buying as it closes feels decisive. That leaves your stop far away and your reward small. Waiting for a pullback will sometimes mean missing the trade, and that is fine.
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