Engulfing

Engulfing

A reversal pattern on a Japanese Candlestick chart that can be bearish or bullish depending upon whether it is in an uptrend or downtrend. An Engulfing Pattern is a two candlestick pattern, where the first day is characterized by a small body, followed by a day whose body completely engulfs the previous day's real body. The second day's real body (candle) should be the opposite color of the first real body. The bearish engulfing pattern signals the end of an uptrend and the bullish engulfing pattern suggests a downtrend reversal.


This first possible version of this formation is characterized by a long red day followed by a Doji Cross that falls within the body of the previous days candle. Up to this point the formation matches the bullish Doji Star (see chart above). The doji illustrates a light day of trading where the open and the close are at the same price. A day of uncertainty after a large bearish move suggests sellers may have lost control of the market. Candlestick analysts will watch for bullish moves in the following days.

In non-FX markets gaps that allow the doji to occur deep within the body of the first days candle are typical. However, such gaps are not possible in efficient, 24 hour Foreign Exchange Markets. Because the close of the first day would match the open of the second day the Forex Market version of this formation might look more like a Harami.

Since the Forex Market version of this pattern is more nuanced, traders pay attention to several details.

• Bullish Harami Cross turns into Bullish Harami
Traditionally Harami patterns give stronger reversal signals than the Harami cross. Since Haramis reflect price opening and then closing higher (analysts will see an actual blue body), it connotes buyers are in even more control of the market than the Harami Cross, which is only able to form a indecisive Doji.

Translating non-FX markets into Foreign Exchange requires getting rid of any gaps between candles. No matter what market we are looking at, FX, Equity and Futures markets typically close at 5:00 PM. Thus the FX version of the Harami Cross will share the previous days close, and should have a small blue candle that trades up within the body of the previous bear move.

This formation is very similar to the Bullish Engulfing formation, except that the move does not trade above the real candles body. Because Harami buyers are not able to rally price much past the previous days midpoint, this patterns offers a weaker signal.

In range bound markets this formation will occur frequently with little significance. But if this pattern occurs after a protracted downtrend, analysts will attach greater importance to it.