3. Candlestick Engulfing Strategy

3. Strategy based on candlestick engulfing

This candlestick combination signals the reversal of the trend in the opposite direction. The signal occurs when a candle appears, which has a larger body than the body of the previous candle and is directed opposite from it. This new candle is called engulfing. After its appearance, it is necessary to track where the candle following it will go. If the candle goes in the direction of the engulfing, then after it is closed, you can enter the market

Trader’s actions when the signal is formed:

1) You have noticed a candlestick that is larger than the previous one and is directed opposite from it.

Bullish engulfing pattern

Bearish engulfing pattern

2) Next, wait for the formation of a new candle in order to confirm the direction.
3) You can open a position in the direction of engulfing only after the candle following the engulfing candle closes.

Buying a put option in a bearish engulfing

It should be taken into account that the larger the engulfing candle, the stronger the movement after the change in the direction of the trend. In case you have a certain margin of profit in your deposit, take some risk and buy the option immediately after the formation of a strong engulfing candle without waiting for the confirmation candle. However, it is important to always remember that the appearance of a candle signal must be confirmed by the candle following it.

Squat candlestick strategy

Strategy based on squat candle

A squat candlestick often signals the trend reversal. The appearance of such a candlestick usually indicates a market uncertainty in the current direction of the movement. Quite often, squat candles occur at price levels. It may be a single candle or there may be several of them. When a candle with a small body and a long shadow is forming, there is a possibility of a reversal of the current trend.

Trader’s actions when the signal is formed:

1) After the formation of the squat candle has ended, you can start preparing for the opening of the position.
2) After the squat candlestick, wait for the appearance of a new candle directed against the current trend.
3) After the closure of a new candle, you can open an option purchase in the direction of its movement.

Buying a put option in a bearish engulfing

Candlestick Engulfing Strategy Day Trading Strategies Trading Guide

Deeper Insight

It’s up to you as a trader to assign value to the signals you see. For example, just because a strategy shows a good signal does not always mean it is a good signal to enter on right away.

With any strategy, you need supporting structure and a good sense of what a high quality signal looks like. Some signals may simply be a reason to start looking for entries, while others may be strong enough for an immediate entry. The only way to really understand the difference is through trading, studying, and gaining experience.

No picture, video, website, or person can fully show you what you will see while the live markets are moving. So with this strategy, I would focus on creating clear parameters for when you should start looking for a setup after an engulfing candle, instead of taking every engulfing candle you see.

In this example, I want you to pay attention to all the red arrows. These are areas where the strategy could get you caught in a bad trade.

Knowing what expiration time to use is another detail that comes from experience and understanding the type of market you are in. A safe rule of thumb is to use an expiration that is about two to three times the value of the chart you are trading from. So if this is a 15 minute chart, your entry should be around 30 to 45 minutes.

The green arrows show areas where the strategy would have paid you. Now look at the first yellow arrow. This is the type of price movement that can make traders feel like the markets are manipulated. The truth is, all brokers and markets can have movement like this. What I want you to notice is that the engulfing candle coming off that area still would have paid you.

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