Understanding the Engulfing Pattern in Candlestick Analysis

When studying price action, one of the most frequently monitored reversal signals is a pattern where a single candlestick “engulfs” the previous candlestick entirely. This pattern is known as the engulfing pattern and serves as a potential indicator of a trend reversal in the market.

What Is the Engulfing Pattern?

Engulfing essentially refers to a situation where the body of the current candlestick completely closes and covers the body of the previous candlestick. It is important to remember that the shadow (wick) is not considered in this measurement. This phenomenon does not occur randomly—certain prerequisites must be met for this pattern to be a valid signal.

Basic Conditions Required

For the engulfing pattern to be recognized as a meaningful signal, two fundamental requirements must be fulfilled first. First, the market must already be in a clear trend condition, whether an uptrend or a downtrend. Second, the formation that appears must consist of two candlesticks that meet specific characteristics according to their type.

Bearish Engulfing: Price Drop Signal

In the context of an ongoing bullish trend, a bearish engulfing appears when there is a change in momentum. The first candlestick shows a small green body, followed by the next candlestick with a large red body that fully engulfs the green candlestick.

Characteristics that must be met for a valid bearish engulfing:

1. The red candlestick body must be longer than the previous green candlestick body
2. The (level) of the lowest point of the red candlestick must be lower than the low point of the preceding green candlestick
3. The close price of the red candlestick should be below the low of the green candlestick, although this is not an absolute requirement

Bullish Engulfing: Price Increase Signal

Conversely, the bullish engulfing develops within a bearish trend. This pattern is marked by the first candlestick having a small red body, followed by the next candlestick with a large green body that fully covers the previous red candlestick.

Criteria that must be met for bullish engulfing:

1. The green candlestick body must be longer than the previous red candlestick body
2. The (level) of the highest point of the green candlestick must surpass the high point of the red candlestick
3. The close price of the green candlestick ideally should be above the high of the red candlestick, but this is optional

Why Is This Pattern Important?

Bullish and bearish engulfing patterns represent critical moments where market sentiment shifts significantly. A deep understanding of these variants helps traders identify more accurate entry opportunities and anticipate potential reversals with greater confidence.