While hammers and hanging man were individual candles, under the engulfing pattern we’re dealing with a group of two candles that form the pattern. The engulfing pattern is a major reversal signal with two opposite color real bodies composing this pattern. This pattern can be both bullish and bearish, so we’re having bullish engulfing pattern and bearish engulfing pattern.
Under a bullish engulfing pattern we’re looking at a falling market and the reversal signal that forms this pattern is a green candle that engulfs the previous red candle’s real body and the main interpretation is that buying pressure in this case has overwhelmed selling pressure.
In order for a group of candles to be considered an engulfing pattern, the following criteria should be met:
- market has to be in an uptrend (for a bearish engulfing to appear) or in a downtrend ( for a bullish engulfing to appear);
- out of the two candles that make the engulfing pattern, the second candle’s real body must engulf the previous one’s body;
the second candle’s real body must be the opposite color than the previous candle’s one. In the case of the bearish engulfing we’re talking about a red candle following a green one, and in the case of the bullish engulfing a green candle following a red one.
The recording that goes with this chapter shows you both bullish and bearish engulfing patterns on different time frames, so you can actually see what they look like and what to expect out of them depending on the time frame they appear.