What is an Engulfing Candle? | Definition & example


An Engulfing Candle refers to a white candlestick that starts lower than the previous day’s closing and concludes higher than its opening. This pattern occurs when a small black (or red) candlestick, indicating a bearish trend, is succeeded by a substantial white (or green) candlestick the following day. In this context, the body of the latter candlestick entirely engulfs or overlaps the former, signaling a bullish trend.

Engulfing candle in a nutshell

  • It consists of two candles, where the second completely engulfs the first, signaling potential trend reversal.
  • Bullish Engulfing: Occurs in downtrends, suggesting a possible upward reversal.
  • Bearish Engulfing: Forms in uptrends, indicating a potential downward reversal.

How to recognize a bullish engulfing pattern?

To recognize a bullish engulfing pattern, look for a two-candle reversal setup where the second candle fully “engulfs” the body of the first, regardless of tail shadow size.

This candlestick pattern, which consists of a smaller hollow candle followed by a larger black candle, develops during a decline. The price opens lower than the previous low on the pattern’s second day, but buying pressure causes it to rise to a greater level than the prior high, resulting in a clear victory for the buyers.

Why would a bullish engulfing pattern exist?

More than just a white candlestick showing price movement up, followed by a black candlestick showing price movement down, constitutes a bullish engulfing pattern. The black candlestick from the day before would not have been able to be swallowed by the body of the white candlestick if the price hadn’t gapped down.

The white candlestick in a bullish engulfing pattern denotes a day when bears initially controlled the price of the stock in the morning before bulls decisively took control by the end of the day because the stock opens lower than it did on Day 1 and closes higher than it did on Day 1.

If there is any upper wick at all, it is usually modest on the white candlestick of a bullish engulfing pattern. This indicates that the day ended as the price was still rising sharply upward because the stock closed at or very close to its highest price.

Bullish engulfing pattern illustration

Let’s use the stock of Philip Morris (PM) as a historical illustration. The corporation’s stock performed exceptionally well in 2011 and continued to rise. But in 2012, the stock declined.

A bullish engulfing pattern developed on January 13, 2012, as the price increased from the day’s opening price of $76.22 to $77.32.

When the stock slightly underperformed, the intraday range on the previous day was overshadowed by this positive day. The action demonstrated that the bulls were still in charge and that the uptrend might experience another wave.

Reversals of bullish engulfing candles

Investors should also look closely at the candlesticks that came before the two that make up the bullish engulfing pattern. It will be easier to determine whether the bullish engulfing pattern represents a genuine trend reversal in light of this wider backdrop.

How to trade Engulfing Candle with Binary Options?

Trading engulfing candles with binary options involves identifying a specific candlestick pattern known as an engulfing pattern and using it as a signal for making binary options trades. Here are the steps to trade engulfing candles with binary options:

Identify Engulfing Patterns

  • Bullish Engulfing Pattern: This pattern can be seen in a downward trend and signals a possible trend reversal. The first candle is bearish, followed by a larger bullish candle that completely engulfs the previous one.
  • Bearish Engulfing Pattern: This pattern occurs in an uptrend and signals a potential reversal. The first candle is bullish, followed by a larger bearish candle that completely engulfs the previous one.

Place the trade

  • Bullish Engulfing Strategy: When identifying a bullish engulfing pattern, traders can initiate a call option as the second candle closes. This strategy capitalizes on the anticipated upward momentum following the shift in market sentiment.
  • Bearish Engulfing Strategy: Once a bearish engulfing pattern is recognized, traders can place a put option as the second candle closes. This strategy takes advantage of the expected downward momentum following the reversal in market sentiment.

Confirming with other indicators

To increase the accuracy of the Engulfing Candle signals, you should combine them with other technical indicators such as the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD).

What does an engulfing candle indicate in market trends?

Candles that completely engulf one another frequently represent a market trend reversal. In this particular pattern, there are two candles, with the second candle “engulfing” the first candle’s entire body. Depending on where the candle is in relation to the trend, it can be bullish or bearish to see an engulfing candle. 

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About the author

Marc Van Sittert
Marc Van Sittert is an experienced Binary Options Trader and coach who is originally from South Africa. He started his career in 2014 by trading old-school Binary Options online. His main focus is on short-term contracts with 60-second trades.

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