Watch this… which one do you think is the Engulfing Candle Pattern out of these 3 Charts? Answer sounds pretty easy right? If you say the third one, you are actually wrong but at the same time you are also correct. Trading is not always a yes or no statement. In reality, trading is so complex that this question will get two different answers. Many will say it’s this one, but there will be some who will say all of them are the same picture. And the thing is, both of them are right. To understand why some traders will say something strange, when the third one clearly has the engulfing pattern, we will first have to understand what the engulfing pattern actually means, and how it is formed. Let me explain.
In one of the previous videos, we tested the Engulfing candlestick pattern 100 times, and found out that the engulfing works more than 50 percent of the time, and price actually goes in the direction of the engulfing candle. If you haven’t watched that video, maybe consider watching it after this video.
Many people consider the Engulfing Candlestick pattern to be one of the important candlestick patterns, because it can tell a lot about the buyers and sellers in the market. For example, let’s say price is making red candles in a downtrend. If it is making red candles, there is a selling pressure, or in other words, there are more sellers who are willing to sell at the current price. Sellers are ruling the market and some buyers are not interested in participating as multiple red candles are forming in a row. But then, for some reason, price makes a big move up, and completely engulfs the previous candle. For some reason, let’s say because the price touched a strong support area, many buyers got interested in buying in this area. The buying pressure was so high, that buyers completely took over all the sellers from the last two candles. But hold on a minute, according to this theory, an engulfing candle was formed, because more buyers were interested in buying when this candle was forming. But what if the same number of buyers bought at the same prices, but a little bit slowly. This is a screenshot of a forex pair on the 15 minutes timeframe. If the same number of buyers would have bought the pair a little bit slowly, two 15 minutes candles would have formed instead of one. But hold on a minute, if the same transaction took place, and the same number of buyers and sellers participated on both these charts, these two charts tell the same story right? and the only difference is the time? Well, you are absolutely right!
Candlestick pattern tells you a story about what happened in the last few candles. And the bullish engulfing patterns shows you that buyers took over the sellers. But what many beginner traders don’t pay attention to, is the time. Your engulfing pattern is limited to your chart timeframe. If you look at the charts on the 15 minute timeframe and an engulfing pattern forms, it indicates that buyers in the last 15 minutes took over the sellers from the 15 minutes before that. This information is good, especially if the engulfing pattern forms near a support area. Let’s say you are waiting for the price to reach your support level, you are waiting for some kind of entry signal, like a candlestick pattern to form near the support area. If an engulfing pattern appears, good for you, now you have an open position, let’s hope it makes profit. Oh look at that, it made a profit. You took a trade using an engulfing pattern and it worked. But what if, instead of engulfing the last two candles in 1 15 minute candle, it doesn’t move much for the first 13 minutes, and starts to make a big move up in the last 2 minutes. Since you were focused on your 15 minute timeframe, buyers according to you, got interested in buying at the end of this candle. When the price started to go up, the 15 minute candle ended, and a new 15 minute candle appeared. So the upward move continued on the next 15 minute candle. Now, no engulfing pattern was formed, even though the same number of buyers and sellers participated in this upward move. At the start of this video, when I asked which one is the engulfing pattern, If you said only the third one, then you would have missed this trading opportunity and the profit, because there was no candlestick entry signal.
If you answered that all of them are telling the same story, then you would enter this trade right here, because you saw that buyers still took over the sellers just like they would in a engulfing pattern. And the only reason you don’t see an engulfing pattern, is because one candle ended and the other one started when the price started the big move up. Furthermore, we can still see that this is an engulfing pattern, if we switch to the 30 minute timeframe. Since you were watching the chart on the 15 minutes time frame, these two candles were formed on the 15 minutes time frame. So on the 30 minute timeframe, these two candles will be one big engulfing candle.
The reason I said the first question will get two different answers was because, these two charts tell the same thing but on different timeframes. If you have a little bit of experience in reading trading charts, you can tell that they are telling the same story. On the 15 minutes time frame, one red candle was formed, and then a big candle completely engulfed it. But if you look closely, on the 5 minutes time frame, price was moving slowly in the downward direction. It took 5 candles just to make this small downward move. But then suddenly, in just two candles, price made an upward move, that was higher than 5 candles. If two candles made a move, that took more than 5 candles to make, by only looking at the 5 minutes timeframe, you can imagine that this price action will form an engulfing pattern on the higher timeframe. Similarly, if it took three 15 minutes candles to make this move, where the price ended approximately where it started, you can imagine how the same price action will look combined on the higher timeframe.
As you can see, all three charts I showed at the start, are from the same forex pair, just the timeframe is different. And now you can see how they all are telling the same story. That’s why both of the answers are right. Only the third one is the engulfing pattern, but if you look at charts differently and imagine how it will look to different traders on different time frames, for you they are the same thing, because they are pretty much telling the same story.
But how to use this information to our advantage? Instead of showing you a random trade, I will show you the trade I actually took on the 6th of November. This is the trade I shared on the Trading Rush Patreon Page on the 6th Nov. As you can see, at first, I took a short trade but the price touched the stoploss immediately. But right after my stoploss was hit, price had a big rejection from the resistance area. The two 5 minutes candles at the resistance area looked like this. And if you imagine how they will look on the 10 minute timeframe, you can see that the resulting candle looks like another candlestick pattern. And this candle opened below the resistance area, tried to go above the resistance area, had a big rejection from above, and closed below the resistance area. In simple words, even though it looks like the price has crossed above the resistance and is going to go up, it is actually showing signs of going down. So I took another short trade, and this time it made a profit, because the price made a move down. Furthermore, the previous loss was recovered, because the trades achieved a 2.5 times more profit than the loss.
So the point is, candlestick patterns in trading can give a lot of information about the price movement, but always remember how they are formed and don’t ignore the hidden candlestick patterns. Because then you might see what many beginners don’t.
