Knowing the candlestick Pattern (Engulfing Bar)

Greetings dear friends and welcome to my blog once again. Just like in my previous post here in this community, I promised to go into detailed explanations and a practical example of the candlestick pattern I listed. Today we want to start with one of the most important candlestick patterns in history and its role in the financial market.

Every candlestick pattern has a special reason for its formation and also it is formed to cause trend configuration or trend reversal as the case may be. With that being said, let's look in-depth at the engulfing bar pattern.

When we say you are engulfed by something we simply mean you are covered by it. Engulfing means to be completely hidden in something which makes you invisible as what engulfs you carries all the glory since it is what people see at the moment.

In the financial market, there are majorly two types of trends and that is the uptrend and the downtrend. This is important because it tells us the movement of the market which is mostly traded by traders i.e. the bullish (uptrend) and the bearish (downtrend).

The engulfing bar is also in two forms i.e. the bearish engulfing bar and the bullish engulfing bar. We are going to look at them one after the other with a more practical example and what is the psychology behind its formation and also what to expect when you see such a chart pattern.

Bullish Engulfing Bar

It is important to mention here that the engulfing bar pattern is made up of two major candlesticks which are usually a bearish candle and a bullish candle. As the name suggests bullish engulfing, this type of candle has a bearish candle as it is first followed by a bullish candle as it is second.

Now, the bullish candle which comes second engulfs the first which is the bearish candle thereby giving us the name bullish engulfing pattern. The image above shows a clear picture of this pattern. Let's look at the psychology behind the formation of this pattern and what we should expect when this pattern is formed.

Psychology of the Bullish Engulfing Bar

When we talk about the psychology behind the formation of any candlestick chart, we are referring to the reason behind the formation of that candle stick bar. So here in this part, I will be explaining the psychology behind the formation of the bullish engulfing bar.

The bullish engulfing bar is always formed when the market wants to move in an uptrend direction. The formation communicates to trades that the bears do not have much momentum to push the market downward any longer.

These chart patterns can be seen as a trend reversal or a trend continuation pattern. When this pattern is seen in an uptrend, it is known as a trend continuation pattern whereas if it is seen in a downtrend, it is seen as a trend reversal pattern.

For an uptrend, when this pattern appears on a chart, all you need is to continue longing I.e buying the market whereas when you see it in a downtrend movement, you should know that the market is about to experience what we called a change of character (CHoCH) which also means you should position yourself for a buying opportunity.

Bearish Engulfing Bar

As the name suggests bearish engulfing, this type of candle has a bullish candle as it is first followed by a bearish candle as it is second.

Now, the bearish candle which comes second engulfs the first which is the bullish candle thereby giving us the name bearish engulfing pattern. The image above shows a clear picture of this pattern. Let's look at the psychology behind the formation of this pattern and what we should expect when this pattern is formed.

Psychology of the Bearish Engulfing Bar

When we talk about the psychology behind the formation of any candlestick chart, we are referring to the reason behind the formation of that candle stick bar. So here in this part, I will be explaining the psychology behind the formation of the bearish engulfing bar.

The bearish engulfing bar is always formed when the market wants to move in a downtrend direction. The formation communicates to trades that the bulls do not have much momentum to push the market upward any longer.

These chart patterns can be seen as a trend reversal or a trend continuation pattern. When this pattern is seen in a downtrend, it is known as a trend continuation pattern whereas if it is seen in an uptrend, it is seen as a trend reversal pattern.

For a downtrend, when this pattern appears on a chart, all you need is to continue shorting I.e selling the market whereas when you see it in an uptrend movement, you should know that the market is about to experience what we called a change of character (CHoCH) which also means you should position yourself for a selling opportunity.

Change of character (CHoCH) is a terminology used in trading that talks about the change in the trend. If for instance, the market has been in a downtrend, then suddenly the trend changes due to the formation of the bullish engulfing bar, we say that there has been a change of character (CHoCH) in the trend.

Conclusion

I want to summarize these by saying that the bullish and the bearish engulfing bar are both trend reversal and trend continuation patterns. When we see the bullish engulfing in an uptrend, we say there will be trend continuation whereas when we see it in a downtrend we know that there will be trend reversal. Similarly the case of the bearish engulfing bar, in a downtrend it is a trend continuation pattern whereas in an uptrend it is a trend reversal pattern.

The formation of these candle patterns shows the bulls or the bears do not have much momentum in the market and the market is also about to experience a change of character (CHoCH) because either the buyers or sellers are taking over the market depending on the type of engulfing bar you see in the market then.

Disclaimer: ^{This post is made as an education and not investment advice. Digital asset prices are subject to change. All forms of crypto investment have a high risk. I am not a financial advisor, before jumping to any conclusions in this matter please do your research and consult a financial advisor.}

NB: All image are taken by me from the tradingview.com website