The Engulfing candle pattern a profitble trading strategy


In order for an Engulfing setup to be valid, both candles must have short wicks. Precisely, we require the total length of the wicks to be no more than 33% of the entire candle’s length. In other words, the majority of the candle must be body. Long wicks represent indecision rather than sustained direction. (Some traders prefer to use a stricter definition of wicks being no longer than 25% or even 20% of the entire candle length.)
Secondly, we give some allowance on how much the first candle’s body is covered. We accept a setup if at least 90% of the first candle’s body is covered by the second candle’s body.
Let’s look at an example of this in action on the AUD/USD daily chart:

Click to enlarge

 
A Bearish Engulfing setup appeared on the AUD/USD daily chart (highlighted in blue) after the price had been trending down for the last six or seven candles. Notice also that the top of the Engulfing setup lined up well with the previous broken support, now being tested as resistance (marked by a dashed red line). Tying this setup with price action gives you as a trader greater confirmation and confidence.
The entry would be the open of the next candle and the stop-loss above the high of the second candle in the setup. As a minimum, aim for a 1:1 risk/reward ratio. In this case, the potential first profit target was hit quickly and cleanly.
The conditions for an Engulfing setup are quite strict, and valid setups take time to appear. The temptation is to move down to lower time frames to find them. However, in our experience their accuracy is particularly potent on hourly charts and above.
In fact, we regularly trade them on four-hour and daily charts for our longer-term signals. The advantage with higher time frames is that spreads matter less because of higher profit targets—this allows you to monitor more pairs that you may not usually consider.

In summary:
An Engulfing setup is a two-candle setup whereby each candle has short wicks and the second candle’s body covers the range of the first candle’s body.
The setup is easy to spot visually, and can be traded in isolation or tied in with surrounding price action. Higher time frames, such as the daily chart, produce more accuracy.


Bullish Candle Pattern



Bullish Candle Pattern

Bullish Candle Pattern





Bearish Candle Pattern



Bearish Candle Pattern

Bearish Candle Pattern



Powerful Implications of Gaps Part 3

Figure 5 – Standard Pacific Corp
Powerfull Implications of GAPS

Many investors are afraid to buy after a gap up. The rationale being that they don’t like paying up for a stock that may have already moved 3%, 5%, 10% already that day.Witnessing a Candlestick “buy” signal prior to the gap up provides a basis for aggressively buying the stock. If it is at the bottom of a trend, that 3%, 5%, 10% initial move may just be the beginning of a 25% move or a major trend that can last for months.Huge gains can be made by finding and knowing the significance of a candlestick signal.

Figure 6 - XMSR, XM Satellite, has signs of bottoming.
The Homing Pigeon, a form of Harami, shows the selling has stopped. A small Hammer, then a Doji/Hammer should be evidence that the sellers are losing strength. The Doji/Hammer should produce an alert that there is major indecision going on at this point. Watch for a strong open the next day.



Figure 6 – XM Satellite 
Powerful Implications of Gaps Part 3

The bigger the gap up, the more powerful the new trend will be. This was evidenced by another small gap up a few days later. Traders may have gotten out at the $8.00 range,still a good return. The longer-term investor should have gotten out at the $16.00 area.
The $12.00 area could have been scary, but notice that after a gap up at $12.25, the lower close still didn’t come into the last white body’s range. The next black candle also didn’t close in the white candle’s range. Profit taking. The bears could not move the price back to the big white candle’s trading range. The bulls took note of this and came back strong after their confidence was built back up. This moved prices to the next level. When prices gapped higher at the $16.00 range, then gapped down from that level, the selling was
picking up strength. If the position was not liquidated then, it would have been logical to do so a few days later when a new high was not reached and an Evening Star formation was seen. Getting out at $15.50 around 5/23 would have produced a very nice 300% plus profit for a little under two months time. That is what you use Candlestick analysis for.
Getting rid of the losing trades quickly.Finding and exploiting the maximum gains from the good trades. Finding! An important element. The gaps produce the opportunities.

Figure 7,Coach Inc., illustrates when a trend is starting out strong.
If investors had been observing these signals, they would want to see bullish signals confirming the reversal. The gap open to $26.00 would have the Candlestick investor getting in on the open. Over the next 7 trading days, the trader could have realized a 27% gain. The long-term investor would have more than doubled those gains over the next few months





Powerful Implications of Gaps Part 3
Figure 7 - Coach Inc

The Morning Star signal is an obvious visual reversal signal. A more potent signal is the Abandoned Baby signal. This is formed by the sellers gapping down a price at the bottom of a trend, trading through a day of indecision with the bulls, then the bulls taking over the next day, gapping prices back up and moving them higher. The bigger that gap, the more powerful the next up move.

As seen in Figure 8 - MERQ, Mercury Interactive Corp. The weak sellers finally give up and get out at the bottom. They are met with bargain hunting bulls. The trading that day forms a Spinning Top, a day of indecision, almost like that of a Doji










Powerful Implications of Gaps Part 2



Figure 2 - Centex Corp.

Powerfull Implications of Forex Gaps
The long-term investor, after analyzing the monthly chart, could have established a position, with the knowledge that funds were flowing into this sector with much more enthusiasm than other sectors, which could have been just rising with the overall tide. A great indication for where to position your funds!

Figure 3 - TOL, Toll Brothers Inc. is another example of the gap up after a Candlestick buy signal, indicating that the investors were coming into this stock with vigor. The result was eventually returns of 80 - 100% in a four or five month time frame.

Figure 3 - Toll Brothers Inc.

Powerfull Implications of Gaps 



Figure 4 - Cross Media Marketing


Note in Figure 4 - XMM, Cross Media Marketing, after Doji/Haramis, that the gap up the next day clearly indicated the trend had stopped. The resulting trades produced 28.5% and 49.3% respectively. Probabilities demonstrate that a gap up is going to preclude an advance in price under these circumstances.
Unofficially, statistics illustrate an 80% and better probability that a trade will be successful when stochastics are oversold, a Candlestick “buy” signal appears, and the price gaps up. (The Candlestick Forum will offer our years of statistical figures as “unofficial.” Even though over fifteen years of observations and studies have been involved, no formal data gathering programs have been fully operated. However, currently the Candlestick Forum is involved with two university studies to quantify signal results. This is an extensive program endeavor. Results of these studies will be released to Candlestick Forum subscribers upon completion.)
Having this statistic as part of an investor’s arsenal of knowledge creates opportunities to extract large gains out of the markets. The risk factor remains extremely low when participating in these trade set-ups.
Note in Figure 5 - SPF, Standard Pacific Corp., gaps up the day after a Harami stops the current downtrend. The gap initiates a move that sends this price to a higher level to stay. The following day gaps up significantly, consolidates for a few days and then gaps up again. The second and third gaps are considered “measuring gaps”. These types of gaps will be explained later in this book. The important aspect from this chart is the initial gap up, revealing that the buying was overwhelming the selling.

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Powerful Implications of Gaps


How Do They Produce Profits With Candlesticks?

Gaps (Ku) are called windows (Mado) in Japanese Candlestick analysis. A gap or window is one of the most misunderstood technical messages. Most investment experts advise not to buy after a gap. This is true only about ten percent of the time. The other 90% of the time, the gaps will reveal powerful high profit trades. Candlestick signals, correlated with the appearance of gaps, provide valuable profit-making set-ups.
What is the best investment you can make? Simple! Learning investment techniques that make you independent of having to rely on any other investment consultation. You can easily learn and quickly master common sense analysis that will dramatically improve your returns for the rest of your life. You will feel confident in every trade you put on. No more “hoping” that a trade will move in your direction. The unique built-in forces encompassed in the candlestick signals and the strength of a move revealed by the existence of a gap produce powerful trade factors. You can rest easy! Obtaining the knowledge that this combination of signals reveals will produce consistent and strong profits.
These are not “hidden” secret signals or newly discovered formulas that are just now being exposed to the investment world. These are a combination of widely known but little used investment techniques. Candlestick signals obviously have a statistical basis to them or they would not still be in existence after all these centuries. Gaps have very powerful implications. Combining the information of the two produces investment returns that very few investors take the time to exploit.
Dissecting the implications of a gap/window makes its appearance easy to understand. Once you understand why a gap occurs at different points in a trend, taking advantage of what the gaps reveal becomes highly profitable. Where a gap occurs is important. The ramification of a gap in a chart pattern is an important aspect to Japanese Candlestick analysis. Some traders make a living trading strictly off of gaps.
Consider what a window or gap represents. In a rising market, it illustrates a price opening higher than any of the previous day’s trading range. (For illustration in this book, the “day” will be the representative time frame.) What does this mean in reality? During the non-market hours, something made owning this stock tremendously desirable. So desirable that the order imbalance opens the price well above the prior day’s body as well as the high of the previous day’s trading range. As seen in Figure 1, note the space between the high of the previous day and the low of the following day.

Figure 1 – Illustration of a gap



Witnessing a gap or window at the beginning of a new trend produces profitable opportunities. Seeing the gap formed at the beginning of the trend reveals that upon a reversal of direction, the buyers have stepped in with a great amount of zeal. A common scenario is witnessing a prolonged downtrend. A Candlestick signal appears, a Doji or Harami, Hammer, or any other signal that would indicate that the selling has stopped. What is required to verify that the downtrend has stopped is more buying the next day.
Many investors are apprehensive about buying a stock that has popped up from the previous days close. A risky situation! Yet a Candlestick investor has been forewarned that the trend is going to change, using a signal as that alert. A gap up illustrates that the force of buying in the new upward trend is going to be strong. The enthusiasm shown by the buyers trying to get into the stock demonstrates that the new trend should have a strong move to it. Use that gap as a strength indicator.
Gaps occur in many different places and forms. Some are easy to see, some are harder to recognize. This book will take you through the different situations where a gap has appeared. Each situation will be explained in detail, (1) to give you a full understanding of what is occurring during the move and (2) to provide a visual illustration to become familiar with the formation, making it easy to recognize. This allows the Candlestick investor to spot an investment situation as it is developing.

Gaps at the Bottom

Knowing that a gap represents an enthusiasm for getting into or out of a stock position creates the forewarning that a strong profit potential has occurred. Where is the best place to see rampant enthusiasm? At that point you are buying near the bottom. Obviously, seeing a potential Candlestick “buy” signal at the bottom of an extended downtrend is a great place to buy. In keeping with the concepts taught in Candlestick analysis, we want to be buying stocks that are already oversold to reduce the downside risk. What is better to see is the evidence that buyers are very anxious to get into the stock.
Reiterating the basics of finding the perfect trades, as found in Mr. Bigalow’s book “Profitable Candlestick Trading”, having all the stars in alignment makes for better probabilities of producing a profit. Consider the Housing construction industry mid-September 2001. The indexes were bottoming out after the 9/11 debacle.
The Housing stocks indicated the best evidence of capital inflow. The initial move to the upside was evident with a large number of good signals found in those stocks after doing a scan of the charts. Investors were really liking the residential home builders. This is clearly seen in Figure 2 - CTX, Centex Corp. It gapped up the same day, illustrating that buyers were coming into this stock with a vengeance. The initial gap is very important. It will indicate how strong the new move will be.

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Read a Candlestick



Read A CandleStick


Could achieve a profit is the dream of all traders. Therefore all traders competing to find the best way to predict the next market direction.Some are trying to predict the next chart only partially predict the next candle. But actually the predicted graph to predict a candle that is a work of the same. Because of this candle if described in a smaller time frame, it forms a graph. As well as a graph, if combined, would form a single candle on a larger time frame.
Therefore, to read one candle we have also read the compiler of Candle Chart on a smaller time frame. Thus will form a rule:
  1. Therefore, to read one candle we have also read the chart penysun candle on a smaller time frame. Thus will form a rule:If the drafters of the candle chart patterns before a bullish continuation pattern, then the next candle will form a bullish candle
  2. If the pattern of the previous candle chart compilers of a bearish continuation pattern, then the next candle will form a bearish candle
  3. If the pattern of the previous candle chart compilers of a bullish reversal pattern, then the next candle will form a bearish candle
  4. If the drafters of the candle chart patterns before a bearish reversal pattern, then the next one will be formed bullish candle
In addition to the above, read one candle can also be done by looking at the chronology of the candle proficiency level.
For example:

1. Candle long tail
Example candle with a long tail is a shooting star. Normally this candle appears at the end of the down trend and occur at oversold conditions.
Chronology:
Market initially moved down the power of the down trend is happening, thus forming a candle with a long body. But as it turns out the market have touched / passing area of ​​support or have entered the arena oversold, then the graph to be turning upside. At the end of the period covered over with the open price. Thus forming a long lower tail.
So down the long tail is the beginning of the movement up or also an attempt to reverse direction. If the chart on the reverse direction of the experiment is not yet established a pattern correction, then the next candle will have a lower tail. However, if the correction pattern has formed, the next candle will directly shape the body without having to form a tail first.

2. Candlebody long tail length.
Examples of this type of candle is green rocket. Rocket called because of its shape like a rocket and her very strong upward like a rocket.
Here we can see that the market initially declined and then reversed point upward, reversal Because power is so great that at the end of the period is much higher candle closed above the open, and form a long body. Here we can see a great enthusiasm to drive the market higher. So the next candle will surely ride.

3. Candle body length.
Eg marubozu bullish. A long body with short tail shows a dominance from start to finish without any significant resistance.
In normal conditions, after marubozu candle will be formed bullish candle with a shorter body, as a form of buying pressure forwarding but also weaken over time.
Yet if at the top of this marubozu no resistance, then the next candle to be down (bearis) as a form of a correction or preparation to climb higher.

HOW TO READ A CANDLE
One candle is enough to achieve a profit. That is the philosophy of a long-term traders. They just expect the profit from a single candle alone but with a lot of points earned. Time frames are usually used it at least 1 day. But for us the intraday traders can do like them, we can win a lot of points by shooting 4-hourly candle.
There are 3 techniques or how to read a candle next one is:
1. Candle power reading techniques
We can read the direction of the next candle to candle power felt before. Because the assumption is that if the power of the previous candle then next candle is the same direction as a form of power remaining is spent.
Power of a candle is actually measured by volume. It means that if a candle has a large volume of the normal length of the body of the candle is also a form of the energy utilization. Maybe we could imagine a vehicle that has a lot of fuel, these vehicles will be able to travel long distances. Completely different if only a little fuel, may only be a short distance away.
Therefore we can conclude:
If the previous candle has great power, but he was short then this means that power has not been used or blockage of energy. So the next candle candle body will explode long form.
If the previous candle has great power and great andle body, then this means that energy has been used. So the next candle remains in line with the previous candle power but long body candle will then be shorter.
2.Candle reading position techniques on a volatile market
In addition to the size of the volume, direction of the next candle can also be seen from the position of the candle itself. Candle in the volatile energy market is larger than the candle is in a quiet market. So the market is volatile candle bodies are usually longer.
Utilization rules that make up the body longer applies in candle position in a volatile market. You can imagine what might be in the middle of the candle volatile short condition is a form of weakening trend? What might at March're passionate easy to navigate reversed?
The answer is not possible. Therefore, if you see a short candle (spining top or doji) after a long candle on high volatility and that the chances of a long candle.
3. Candle reading techniques at the end of the trend
End of a trend is a very potential area of ​​reversal direction. Therefore, it is usually a tip trend occurred in the area saturated. Signs the market will reverse direction is the emergence of resistance and turning toward trial in the form of tail candle.
So, if you see a candle with a long tail equal to or greater than the length of the body and occurs in the saturated area, then it shows that there is a candle that had been resistance. Therefore the direction of the next candle will be opposite to the direction of the trend is going.
Those are some techniques to read the next candle.
May be useful.