The Engulfing Candle Day-Trading Strategy
What is the definition of engulfing?
Engulf is a verb that means being “completely surrounded”. In our case, we will talk about candle patterns.
What is the Engulfing pattern in trading?
Bullish engulfing pattern definition: The Bullish Engulfing Candlestick Pattern is considered to be a bullish reversal pattern during a downtrend and occurs when the bullish candle engulfs the smaller bearish candle from the period before.
Bearish engulfing pattern definition: The Bearish Engulfing Candlestick Pattern is considered to be a bearish reversal pattern during rising trends and occurs when the bearish candle engulfs the smaller bullish candle from the period before.
It cannot be denied that one of the best things that a trader can learn to perform is engaging in trading that is based on a trend. One sure method to enter the realm of trading moves as the momentum is gaining a quicker pace is to apply the usage of the engulfing candle day-trading strategy.
Daily Candle Engulfing Pattern Trading Strategy Case Study
Let us create one trading strategy. Rules are:
Buy on next day open price if we have the bullish pattern on the daily chart:
If Low 2 < Low 1 AND High 2 > High 1 AND Close 2 > Close 1
Stop loss: Low 1
Target: Risk/Reward 1:1
Sell on next day open price if we have the bearish pattern on the daily chart:
If Low 2 < Low 1 AND High 2 > High 1 AND Close 2 < Close 1
Stop loss: High 1
Target: Risk/Reward 1:1
We tested this strategy using the daily candle EA test on major forex pairs. We wanted to see the results.
The number of trades: 8953
The average winning ratio for Daily Candle Engulfing Pattern Trading Strategy was: 54%
The best result we had when we tested on high volatility currency pairs such as GBPUSD or GBPJPY and the worst performance on low volatility currency pairs. Our expectations were much bigger. We tried to add an additional rule to make a better performance.
We noticed that if we have a bullish engulfing pattern and Close 2 price is near to High 2 price than results are much better.
And of course, if we have a bearish engulfing pattern and Close 2 price is near to Low 2 price than results are much better too.
Close 2 price needs to be above SMA 50 for a bullish trend and below SMA 50 for bearish trend on the daily chart.
Our new rules are :
Buy on next day open price if we have the bullish pattern on the daily chart:
If Low 2 < Low 1 AND High 2 > High 1 AND Close 2 > Close 1 AND Close 2 > SMA 50
Stop loss: Low 1
Target: Risk/Reward 1:1
Sell on next day open price if we have the bearish pattern on the daily chart:
If Low 2 < Low 1 AND High 2 > High 1 AND Close 2 < Close 1 AND Close 2 < SMA 50
Stop loss: High 1
Target: Risk/Reward 1:1
The number of trades: 8953
The average winning ratio for Daily Candle Engulfing Pattern Trading Strategy was: 59%
About engulfing candle on charts
The broad sections of candlesticks that are noticed on a candlestick pricing chart are referred to as real bodies. When a candle is bearish or down, the upper part indicates the price at the opening phase; while the bottom part indicates the price at the closing phase in regard to the period that is being observed. Frequently, the color red or black is used to denote the real body pertaining to a down candle. On the other hand, frequently there is the usage of the color green or white to denote the real body pertaining to an up candle. In relation to prices, both low ones and high ones can be presented via lines that are thin in essence, which resemble the appearance of wicks of a candle. These lines surpass the boundary of the real body.
If there is the total envelopment of the real body pertaining to the prior up candle by the real body pertaining to a down candle, then this indicates the occurrence of an engulfing candle that is bearish. If there is the total envelopment of the real body pertaining to the prior down candle by the real body pertaining to the up candle, this indicates the occurrence of an engulfing candle that is bullish.
It is a good idea to conduct the isolation of a trend. When it comes to the application of the strategy of the engulfing candle in the matter of day-trading, it is needful to engage in the determination of the predominant direction of the trend. This will then result in the direction that the trader will apply to perform his or her trades.
There is the presence of an uptrend when prices possess highs that are higher-swinging as well as lows that are higher-swinging. Prices are noted to follow the momentum of a pattern of waves, such as engaging in advancements, drawing backward and moving forward once again. In the state of the uptrend, the trader should be careful to only implement positions that are long, which means the trader will purchase with the purpose of selling at a later time for a price that is relatively higher.
There is the existence of a downtrend in such cases that the price possesses lows that are lower-swinging as well as highs that are lower-swinging. In the case of a downtrend, the waves are in a state of decline, which means that they are larger in size than the pullbacks that are higher in essence. As a result, this produces a lower state of progress overall. When there is the presence of a downtrend, the trader will engage in implementing positions that are short, with the purpose of selling an asset that is borrowed based on the premise of desiring to purchase and return it at a later time at a rate that is lower.
