Crypto Candlestick Mastery: A Beginner’s Guide to Engulfing Patterns

Candlestick patterns are essential tools in crypto trading as they can provide high-quality trading signals. Therefore, it is beneficial for crypto traders to have a clear awareness of powerful candlestick patterns. There are several prominent patterns that can contribute to traders’ success, and one of the most prominent among them is Engulfing Candlestick Patterns. Let’s explore this pattern in depth.

1. Engulfing Candlestick Patterns Defined 

Engulfing Candlestick Patterns in crypto trading, which signal a market reversal, involve two bars on a chart: the second bar is much larger than the first, fully covering or ‘engulfing’ the initial one. 

1.1. Identifying A Perfect Engulfing Candlestick Pattern: Know How 

Here are the ways to identify a perfect Engulfing Candlestick Pattern.

The high and low of the second cable must cover the entire range of the first candle, indicating a strong shift in market sentiment.

Ideally, a surge in trading volume accompanies the perfect engulfing pattern, confirming increased market activity and supporting the reliability of the reversal signal.  

2. Types of Engulfing Candlestick Patterns 

Engulfing Candlestick Patterns come in two types: Bullish and Bearish.

In a Bullish Engulfing Candlestick Pattern, a small red candle is followed by a much larger green one, signalling an upward shift in a downtrend. 

Conversely, a Bearish Engulfing Candlestick Pattern features a short green candle entirely covered by a subsequent red one, indicating a potential downturn after an uptrend. 

3. How to Confirm an Engulfing Candlestick Pattern 

The confirmation of an Engulfing Candlestick pattern occurs with the next candle breaking the body level of the engulfing candle. 

For a valid Bullish Engulfing Candlestick pattern, a third bullish candle breaks the engulfing candle’s body upward, reinforcing the potential for an upward trend.

Conversely, in a valid Bearish Engulfing Candlestick pattern, a third bearish candle breaks the engulfing candle’s body downward, supporting the indication of a potential downtrend.

4. What Do Engulfing Candlestick Patterns Convey 

Engulfing Candlestick patterns can convey who is in control of the market – sellers or buyers. Bullish and Bearish Engulfing Candlestick patterns tell two different stories. 

4.1. What Does A Bullish Engulfing Candlestick Pattern Tells 

A Bullish Candlestick pattern signals that buyers have taken control after a bearish phase. Crypto traders often interpret this as a ‘buy’ signal, suggesting a market reversal. 

The pattern prompts those in a short position to consider closing their trade. 

4.2. What Does A Bearish Engulfing Candlestick Pattern Speaks

A Bearish Engulfing pattern warns traders of an impending market downtrend, following a prior price increase. This signals a takeover by bears.

This pattern serves as a cue for traders to enter a short position. For those in a long position, it signals consideration for trade closure. 

5. Top Engulfing Candlestick Pattern Trading Strategies 

Here are the top four Engulfing Candlestick pattern trading strategies commonly used by crypto traders.

• Engulfing Candlestick Pattern Trade Entry Strategy 

Enter a trade after the third candle confirms the engulfing pattern, breaking the body in the expected direction. 

For a bearish scenario, the breakout is below the engulfing candle’s lower level, signalling a short trade. 

In a bullish setup, the breakout is above the upper level, prompting a bullish trade.

• Engulfing Candlestick Pattern Stop Loss Strategy 

Protect trades with a stop loss beyond the engulfing pattern’s extreme. 

For a bullish set up, place the stop loss below the lower candlewick; for a bearish scenario, position it above the upper candlewick.

• Engulfing Candlestick Pattern Take Profit Strategy 

Hold an engulfing trade for a move at least equal to the pattern’s size – measured between the tips of the upper and lower candlewick of the engulfing candle.

• Engulfing Candlestick Pattern at Support and Resistance Strategy 

Identify strong market signals when a bearish engulfing pattern aligns with a resistance area or a bullish engulfing pattern pairs with a support level. These scenarios indicate potent bearish or bullish potential, respectively.

Endnote 

In conclusion, mastering Engulfing Candlestick Patterns can significantly enhance a crypto trader’s decision-making. These patterns, signalling market reversals, offer valuable insights into buyer and seller dynamics. Identifying a perfect Engulfing Candlestick pattern involves assessing complete converge and confirming volume surges. Bullish Engulfing suggests a shift in favour of buyers, signalling a potential ‘buy’ opportunity, while Bearish Engulfing warns of a looming downtrend, prompting consideration for short positions. Confirmation comes with the next candle breaking the engulfing candle’s body, guiding trade entries. Top strategies involve precise trade entries, strategic stop-loss placement, taking profits based on pattern size, and recognising pattern significance at support and resistance levels. These insights empower crypto traders with the tool to navigate market fluctuations effectively, enhancing their overall trading success.