Candlestick Pattern: Engulfing
The engulfing pattern is the opposite of harami pattern with the exception that candlesticks that form patterns should not be the same color (light and dark). This is similar to an outward reversal pattern. Like the Harami pattern, the engulfing pattern consists of two candles. The first candlestick is a relatively short candlestick with a short body and a second candlestick is a big candlestick with a large real body that swallows 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 color candlesticks significant enough to distinguish the type.
First, the engulfing pattern is a trend reversal pattern and hence price movement must have an earlier trend. This pattern is more reliable if it appears at or near the support or resistance line, or trend line. Secondly, the color of candlesticks is important.
The price movement is rising or in the ascending trend, the first candlestick in this pattern should show a bright color that closes higher than the open price (candle bullish). Then the second candlestick, should be a bigger candlestick and dark color, indicating that the close price is lower than the open price (candle bearish). The first small real body candlestick shows the level of doubt and uncertainty about the upward trend that is going on. Then the second big candlestick body indicates that the seller has been bigger than the buyer and is very likely to be the beginning of the downtrend.
Conversely, price movements are descending or in descending trends, the first candlestick in the pattern should show the dark color that closes lower than the open price (bearish candle). Then the second candlestick, should be a bigger candlestick and light-colored, indicating that the close price is higher than the open price (candle bullish). The first small real body candlestick shows the level of doubt and uncertainty in downtrend and the second big candlestick body indicates that the buyer has been bigger than the seller and the uptrend is very likely to happen.
Third, the real body candlestick is actually very important because the smaller body implies greater doubt and uncertainty.
Fourth, the volume on the second candlestick must be higher than the first candlestick.