The Engulfing Candle Day-Trading Strategy
What is the definition of engulfing?
Engulf is a verb that means being “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 a bullish reversal pattern during a downtrend and occurs when the bullish candle engulfs the smaller bearish candle the period before.
Bearish engulfing pattern definition: The Bearish Engulfing Candlestick Pattern is considered a bearish reversal pattern during rising trends. It 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.
Engulfing trading strategy
Engulfing pattern trading strategy is based on an algorithm where traders need to define the major trend in the first step and then enter into a trade when an engulfing pattern between two candles occurs in the primary trend direction. Enter a long trade when the opening price is above engulfing bullish candle close (Close 2 price). Enter a short trade when the opening price is below engulfing bearish candle close (Close 2 price).
Daily Candle Engulfing Pattern Trading Strategy Case Study
Let us create one trading strategy. Rules are:
Buy on the following 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%
We had the best result when we tested high volatility currency pairs such as GBPUSD or GBPJPY and the worst performance on low volatility currency pairs. Our expectations were much more significant. We tried to add a 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, then the results are much better.
And of course, if we have a bearish engulfing pattern and Close 2 price is near to Low 2 price, then results are much better too.
Close 2 price needs to be above SMA 50 for a bullish trend and below SMA 50 for a bearish trend on the daily chart.
Our new rules are :
Buy on the following 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 noticed on a candlestick pricing chart are referred to as natural 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 regarding the period that is being observed. The color red or black is frequently used to denote the actual body of a down candle. On the other hand, often, there is the color green or white usage to tell the existing body of an up candle. Both low and high ones can be presented via thin lines in essence, which resemble the appearance of wicks of a candle. These lines surpass the boundary of the natural body.
Suppose the natural body’s total envelopment about the prior up candle by the real body about a down candle indicates a bearish engulfing candle. The whole body’s complete envelopment about the last down the entire body about the up candle means a bullish engulfing candle.
It is a good idea to conduct the isolation of a trend. When it comes to applying the strategy of the engulfing candle in day-trading, it is needful to engage in the determination of the predominant direction of the trend. This will then result in the order 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. The trader should be careful only to implement long-term positions in the uptrend, which means the trader will purchase to sell later for a relatively higher price.
There is a downtrend in such cases that the price possesses lows that are lower-swinging and 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 form of progress overall. When there is a downtrend, the trader will implement short positions to sell an asset in t selling borrowed based on desiring to purchase and return it later at a lower rate.
