Engulfing candles, both bullish and bearish, are well-known and widely used candlestick patterns in technical analysis. Traders often rely on these patterns to identify potential trend reversals and make informed trading decisions.
However, it’s important to note that the concept of engulfing candles goes beyond the familiar bullish and bearish engulfing patterns. In fact, there are several variations and adaptations of the original engulfing candle pattern that traders can explore to further expand their trading strategies and gain a deeper understanding of market dynamics.
Understanding Engulfing Candles:
Before we explore the strategy, let’s briefly recap engulfing candle patterns. Engulfing candles are powerful candlestick formations that occur when the body of a candle fully engulfs the body of the previous candle.
This pattern indicates a potential reversal or continuation of the prevailing trend and can provide valuable entry and exit points for traders and automated strategies.
The Basic Engulfing Candle Strategy:
The basic engulfing candle strategy involves identifying a simple engulfing candle pattern and using it as a signal to enter or exit trades. However, in our enhanced strategy, we will introduce an additional filter to gauge the strength and size of the simple engulfing candle pattern, thereby increasing the reliability of our trading signals.
Adding the Strength and Size Filter:
To determine the strength and size of an engulfing candle pattern, we will consider the following factors:
Candlestick Body Size:
A larger body on the engulfing candle indicates stronger market sentiment. By comparing the body size of the engulfing candle to the average range of recent candles, we can gauge its significance. If the engulfing candle’s body is significantly larger than the average, it suggests a stronger signal.
Wick Length:
Analyzing the length of the wicks (upper and lower shadows) can provide additional insights. Engulfing candles with shorter wicks imply stronger buying or selling pressure, indicating a more reliable signal.
Volume Confirmation:
Volume plays a crucial role in confirming the strength of an engulfing candle pattern. Higher-than-average trading volume during the engulfing candle formation signifies increased market participation, validating the potential strength of the pattern.
By incorporating these factors into our engulfing candle strategy, we can filter out weaker setups and focus on the ones that exhibit stronger signals, increasing our odds of successful trades.
Implementing the Enhanced Strategy:
During this episode Nathan will discuss ways in which you can implement Engulfing patterns into your automated trading strategies.
By incorporating a strength and size filter into your engulfing candle strategy, you can improve the quality of your trading signals and increase the probability of successful trades.
If you would like to learn more about creating automated trading strategies check out the Trading Talk series which has a new episode each week with different topics and concepts on popular automated trading strategies.
Why wait? Get started today. Sign up for an account today with the Tradeview Forex broker www.tradeview.tech and start creating your own automation.
