Engulfing Candle Pattern Variations Explained (real chart examples)

Engulfing Candle Pattern Variations Explained (real chart examples)
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The Engulfing Pattern is a candlestick chart pattern which signals a potential reversal in the market. In this article we will show you how to identify two variations of it in the right market position with real chart examples. We also include links to our free MT4 indicators.

Engulfing Pattern Recap (or read full article):

The Engulfing Candle Pattern is a two candle pattern which signals a reversal in the market. The Pattern can be Bullish or Bearish depending on where it forms.

Bullish Engulfing Candle Pattern should be identified as a signal when occurring in a down-trending market or at the bottom of a range. Bearish Engulfing Candle Pattern should be identified as a signal when occurring in an up-trending market or at the top of a range.

The Engulfing Pattern is more significant when it engulfs more than one prior session. There are variation of the pattern where this is implemented:

  • Engulfing Candle Pattern By Number: more than one prior session’s real body is engulfed by the final candle and these engulfed candles are within the range of the final candle’s real body.
  • Engulfing Candle Pattern By Size: more than one prior session is engulfed by the final candle. These engulfed candles’ real bodies may be outside the range of the final candle’s real body so long as their size is smaller than the final candle.

Additional notes:

  • A true Engulfing Pattern must form the final two candles, i.e. for a Bullish Engulfing this is a red (bearish) candle followed by a green (bullish) candle and vice versa for the Bearish Engulfing Pattern.
  • There is no set number of additional candles to engulf and the previous candles can be any colour.
  • Bullish Engulfing: The market must be in a clearly definable down-trend even if the trend is short term.
  • Bearish Engulfing: The market must be in a clearly definable up-trend even if the trend is short term.

Quick Reference Guide – Candlestick Basics. If you need a reminder of what candlesticks are have a look at our free PDF – Candlesticks Explained.

The criteria and examples above are just the technical definitions of this pattern. However patterns are only useful with context and with real chart examples.

No pattern will ever exactly match the criteria and in order to be a useful signal must occur in the correct place in a trend. Let’s start by looking at the the classification table for this pattern.

Bullish Engulfing by Size Candle Pattern Classification Table

Number of Candles In Pattern 2 or more
Type: (Reversal/Continuation) Reversal
Bullish/Bearish/Indecision Bullish
Market Conditions: Range, Down-trend, Up-trend Down-trend, Ranging
Position: Top, Bottom, Range Bottom

Bearish Engulfing by Size Candle Pattern Classification Table

Number of Candles In Pattern 2 or more
Type: (Reversal/Continuation) Reversal
Bullish/Bearish/Indecision Bearish
Market Conditions: Range, Down-trend, Up-trend Up-trend, Ranging
Position: Top, Bottom, Range Top

Bullish Engulfing by Number Candle Pattern Classification Table

Number of Candles In Pattern 2 or more
Type: (Reversal/Continuation) Reversal
Bullish/Bearish/Indecision Bullish
Market Conditions: Range, Down-trend, Up-trend Down-trend, Ranging
Position: Top, Bottom, Range Bottom

Bearish Engulfing by Number Candle Pattern Classification Table

Number of Candles In Pattern 2 or more
Type: (Reversal/Continuation) Reversal
Bullish/Bearish/Indecision Bearish
Market Conditions: Range, Down-trend, Up-trend Up-trend, Ranging
Position: Top, Bottom, Range Top

What Price Action Does The Engulfing Candle Pattern Represent?

All candlestick patterns are formed by price action. But the popular ones represent price action that may have significance in signalling the direction of the market.

Bullish Engulfing Candle Pattern

The Bullish Engulfing Candle Pattern forms when a candle opens with a gap down (the open is below the close of the previous candle). The market then rallies up and closes well above the previous candle’s open.

This indicates that the bearish trend may be rejected and a reversal of the trend may occur. If the first candle has a relatively small real body and the second is relatively large, it could provide additional indication of the trend running out of steam.

Bearish Engulfing Candle Pattern

The Bearish Engulfing Candle Pattern forms when a candle opens with a gap up (the open is above the close of the previous candle). The market then falls and closes well below the previous candle’s open.

This indicates that the bullish trend may be rejected and a reversal of the trend may occur. If the first candle has a relatively small real body and the second is relatively large, it could provide additional indication of the trend running out of steam.

Note: With any candle pattern or signal, it is more significant when there is confirmation from another indicator or via forming at a key level. It is always good practice to look for confirmation for any signal that you are looking to trade.

Engulfing Candle by Size Pattern Example With Confirmation

In the UK100 market example below our Engulfing Pattern By Size indicator identified an Engulfing Pattern that was bigger than a large number of preceding candles.

The price action leading up to the formation had seen some resistance at a round number level. The price attempted to break out and was strongly rejected. The formation of the pattern in line with key resistance is a good example of confirmation.

Bearish Engulfing by Size Candle Pattern Example With Confirmation
Bearish Engulfing by Size Candle Pattern Example With Confirmation

Engulfing Candle by Number Pattern Example With Confirmation

In the UK100 market example below our Engulfing Pattern By Number indicator identified an Engulfing Pattern that also engulfed another two candles within its real bdy range.

The price action was down-trending and then started to consolidate and find support. This support coincided with a round number level.

The Engulfing Pattern then formed at this level following a failed break of support. The formation of the pattern in line with key resistance is a good example of confirmation and helps to give the trader more confidence.

Bullish Engulfing by Number Candle Pattern Example With Confirmation
Bullish Engulfing by Number Candle Pattern Example With Confirmation

Note: you can get a free round level indicator for MT4 from us here: Round Levels MT4 Indicator.

In What Market Conditions Does The Engulfing Candle Pattern Become A Signal?

To recap, the Bullish Engulfing Candle Pattern can be seen as a potential signal when forming at the bottom of a down-trend or the bottom of a range. It is preferable to see a sustained down-trend which loses momentum prior to the formation of the Engulfing Pattern.

The Bearish Engulfing Candle Pattern can be seen as a potential signal when forming at the top an up-trend or the top of the range. It is preferable to see a sustained up-trend which loses momentum prior to the formation of the Engulfing Pattern. Let’s look at a couple of real chart examples.

Bullish Engulfing by Size Candle Pattern In A Ranging Market

A ranging market is one where the price action moves up and down between two sets of support and resistance. This is also known as a sideways, balancing or horizontal market. In essence the price action is struggling to break out of the range decisively either on the upside or downside.

Ranging Market Example
Ranging Market Example

As you can see in this example of the EURGBP, the market was ranging and a Bullish Engulfing Candle Pattern occurred at the bottom of the range which also engulfed several other candles.

This helped to confirm the bottom of that leg down. This pattern is not a good signal in a ranging market but seeing it in this position may give an indication that the bottom of the range is unlikely to be broken.

Bullish Engulfing by Size Candle Pattern In A Ranging Market Example
Bullish Engulfing by Size Candle Pattern In A Ranging Market Example

Bullish Engulfing by Size Candle Pattern In A Down-Trending Market

A down-trending market is one where the price action generally moves down over time and is characterized by lower lows and lower highs.

Down-trending Market Example
Down-trending Market Example

As you can see in this UK100 example, the market was down-trending. A Bullish Engulfing Candle Pattern formed and our By Size indicator showed that it was bigger than many of the previous candles.

Bullish Engulfing by Size Candle Pattern In A Down-Trending Market Example
Bullish Engulfing by Size Candle Pattern In A Down-Trending Market Example

Bearish Engulfing by Size Candle Pattern In A Ranging Market

In this UK100 market example we can see how the Bearish Engulfing Pattern formed which was significantly larger in size than much of the preceding price action which potentially signalled rejection of a move up.

An Engulfing Pattern is not a good signal in a ranging market but it can be useful to confirm the resistance at the top of the range and show that a breakout is less likely at that point.

Bearish Engulfing by Size Candle Pattern In A Ranging Market Example
Bearish Engulfing by Size Candle Pattern In A Ranging Market Example

Bearish Engulfing by Size Candle Pattern In An Up-trending Market

An up-trending market is one where the price action generally moves down over time and is characterized by higher lows and higher highs.

Up-trending Market Example
Up-trending Market Example

In this UK100 example below the market was in an up-trend. The Bearish Engulfing Candle then formed signaling a potential reversal.

Our indicator showed that it was also larger in size than several preceding candles potentially increasing its significance.

Bearish Engulfing by Size Candle Pattern In An Up-trending Market Example
Bearish Engulfing by Size Candle Pattern In An Up-trending Market Example

Bullish Engulfing by Number Candle Pattern In A Ranging Market

In the US500 example below we can see that the three candles preceding the Bullish Engulfing Pattern were within the range of the real body of the last candle.

This adds confidence to the signal and the market rallied and found the bottom of the range at that level.

Bullish Engulfing by Number Candle Pattern In A Ranging Market

In the US500 example below we can see that the three candles preceding the Bullish Engulfing Pattern were within the range of the real body of the last candle.

This adds confidence to the signal and the market rallied and found the bottom of the range at that level.

Bullish Engulfing by Number Candle Pattern In A Ranging Market Example
Bullish Engulfing by Number Candle Pattern In A Ranging Market Example

Bullish Engulfing by Number Candle Pattern In A Down-Trending Market

In the UK100 market example below the market was down-trending before forming a period of consolidation.

A Bullish Engulfing By Number Pattern then occurred, neatly engulfing the area of consolidation and preceded a break out and a reversal of the trend.

Bullish Engulfing by Number Candle Pattern In A Down-Trending Market Example
Bullish Engulfing by Number Candle Pattern In A Down-Trending Market Example

Bearish Engulfing by Number Candle Pattern In A Ranging Market

In this UK100 example below we have another good example of a Bearish Engulfing by Number Pattern forming and helping to confirm the area of resistance at the top of the trend.

Bearish Engulfing by Number Candle Pattern In A Ranging Market Example
Bearish Engulfing by Number Candle Pattern In A Ranging Market Example

Bearish Engulfing by Number Candle Pattern In An Up-trending Market

In this UK100 example below the Bearish Engulfing Pattern formed after a good up-trend.

The pattern itself showed strong bearish price action on the final candle and engulfed, within its true body range, several prior candles. The market then reversed and moved down.

Bearish Engulfing by Number Candle Pattern In An Up-trending Market Example
Bearish Engulfing by Number Candle Pattern In An Up-trending Market Example

Engulfing Candle Pattern MT4 Indicator Downloads (free)

If you trade using MT4 then why not try out our free MT4 indicators? The indicator will scan the market based on the criteria shown in this article and identify them on the chart.

There is also an alternate version which can show the signal in a separate indicator window of the chart if that is your preference.

Links Below:

Engulfing Candle Pattern Variations PDF (free)

You can download a free PDF below:

Important Information About Candlestick Patterns

Attribution:

All of the candlestick patterns that we explain on NothardTrading.com must be attributed to Steve Nison and his books on candle charting, the most famous of which was Japanese Candlestick Charting Techniques (Amazon). You can also find out more at his website here.

Interpretation Of Candle Patterns:

It is important to note that these patterns were originally identified on the daily timeframes of index charts, which is still where they are the most useful. However, this does not mean that they cannot be used for other markets or time frames.

No signal is perfect and should never be used as such. Any patterns that you identify only signals a potential move based on the fact that history repeats itself and forms regular patterns in similar situations.

But past performance is no guarantee of future results! So always treat these patterns with care and think of these guidelines when using them.

Best practice guide for trading of candle patterns:

  • No pattern is ever perfect. Be aware that patterns will form slightly differently each time and in different markets.
  • Use them as consistently as possible. Even though you will never find patterns exactly the same, you should always implement a consistent ruleset when identifying and using patterns.
  • It is never a guarantee, only an indication.
  • Make sure you are using it in the right context. For example if it is a continuation pattern then don’t use it to trade reversals!
  • Use multiple signals (confirmations) to have more confidence in your trading.

More About Candlestick Patterns

If you are interested in reading more about candlestick patterns you can find our articles on this topic here: https://www.nothardtrading.com/category/candle-patterns/ or choose a pattern below to read more. 

Justina Nothard

Justina Nothard

Hi, I’m Justina Nothard, a retail investor trading Stock Index Futures.

I understand how hard it can be for the ordinary trader to learn the basics and find useful tools and practical information.

This is why I decided to create Nothard Trading to help you take control of your trading.

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