Bearish/Bullish Engulfing

Bearish and Bullish Engulfing Candlestick Patterns: A Beginner's Guide for Binary Options Trading

Bearish and Bullish Engulfing are powerful reversal candlestick patterns used extensively in Technical Analysis to identify potential shifts in Market Trends. These patterns are particularly valuable for Binary Options Trading due to their clear visual signals and relatively high probability of success when interpreted correctly. This article will provide a comprehensive overview of these patterns, including their formation, interpretation, confirmation techniques, and how to integrate them into your binary options strategy.

Understanding Candlestick Charts

Before diving into the specifics of Engulfing patterns, it's crucial to understand the basics of Candlestick Charts. Each candlestick represents the price movement of an asset over a specific time period (e.g., 1 minute, 1 hour, 1 day).

Body: The filled or hollow part of the candlestick represents the range between the opening and closing prices. A filled (usually black or red) body indicates the closing price was lower than the opening price (bearish), while a hollow (usually white or green) body indicates the closing price was higher than the opening price (bullish).
Wicks (or Shadows): The thin lines extending above and below the body represent the highest and lowest prices reached during the period. The upper wick shows the highest price, and the lower wick shows the lowest price.

These patterns aren't just about *what* happened with price; they reveal the *battle* between buyers and sellers, offering insights into potential future movements.

The Bullish Engulfing Pattern

The Bullish Engulfing pattern is a reversal pattern that suggests a potential shift from a Downtrend to an Uptrend. It’s a bullish signal, indicating that buying pressure is overcoming selling pressure.

Formation:

1. A clear Downtrend must be present prior to the pattern’s formation. This is critical; the pattern is meaningless in a sideways or uptrending market. 2. The first candlestick in the pattern is a small-bodied bearish (red or black) candlestick. 3. The second candlestick is a large-bodied bullish (white or green) candlestick that “engulfs” the body of the previous bearish candlestick. This means the bullish candlestick’s body completely covers the body of the previous bearish candlestick, from the bearish candle's open to its close. The wicks don’t necessarily need to be engulfed, only the bodies.

Interpretation:

The Bullish Engulfing pattern indicates that buyers have entered the market with significant force. The initial bearish candle suggests continued selling pressure, but the subsequent large bullish candle demonstrates a decisive rejection of lower prices. The fact that the bullish candle completely engulfs the previous bearish candle signifies a strong shift in momentum.

Binary Options Application:

For binary options traders, a Bullish Engulfing pattern can signal a potential “Call” option. However, it’s crucial to wait for confirmation (see section below). The expiration time should be chosen based on the timeframe of the chart. For example, if the pattern forms on a 1-hour chart, an expiration time of 2-3 hours might be appropriate. Consider using strategies like High/Low Option or Touch/No Touch Option.

The Bearish Engulfing Pattern

The Bearish Engulfing pattern is the opposite of the Bullish Engulfing pattern. It’s a reversal pattern that suggests a potential shift from an Uptrend to a Downtrend. It’s a bearish signal, indicating that selling pressure is overcoming buying pressure.

Formation:

1. A clear Uptrend must be present prior to the pattern’s formation. 2. The first candlestick in the pattern is a small-bodied bullish (white or green) candlestick. 3. The second candlestick is a large-bodied bearish (red or black) candlestick that “engulfs” the body of the previous bullish candlestick. Again, only the bodies need to be engulfed.

Interpretation:

The Bearish Engulfing pattern indicates that sellers have entered the market with significant force. The initial bullish candle suggests continued buying pressure, but the subsequent large bearish candle demonstrates a decisive rejection of higher prices. The complete engulfing of the bullish candle signifies a strong shift in momentum.

Binary Options Application:

For binary options traders, a Bearish Engulfing pattern can signal a potential “Put” option. As with the Bullish Engulfing pattern, confirmation is essential. An expiration time of 2-3 times the timeframe of the chart is a reasonable starting point. Consider using strategies like 60 Second Binary Options for rapid profit potential, but with increased risk.

Confirmation Techniques

While Engulfing patterns are strong signals, they aren’t foolproof. It’s essential to seek confirmation before executing a trade. Here are some common confirmation techniques:

Volume: Increased trading Volume during the formation of the engulfing candlestick is a positive sign. Higher volume suggests stronger participation and conviction behind the price movement.
Following Candlestick: The candlestick immediately following the engulfing pattern should confirm the reversal. For a Bullish Engulfing pattern, the next candlestick should be bullish. For a Bearish Engulfing pattern, the next candlestick should be bearish.
Support and Resistance: If the Bullish Engulfing pattern forms at a key Support Level, it increases the likelihood of a successful reversal. Similarly, if the Bearish Engulfing pattern forms at a key Resistance Level, it increases the likelihood of a successful reversal.
Technical Indicators: Combine the Engulfing pattern with other Technical Indicators like the Moving Average Convergence Divergence (MACD), Relative Strength Index (RSI), or Stochastic Oscillator to confirm the signal. For instance, a bullish crossover on the MACD coinciding with a Bullish Engulfing pattern provides stronger confirmation.
Trendlines: A break of a Trendline coupled with the engulfing pattern adds to the signal’s strength.

Examples and Visualisations

Let's illustrate with examples.

Bullish Engulfing Example:

Imagine a stock trading in a downtrend. The first candlestick is a small red body, closing at $50. The next candlestick is a large green body, opening at $50.50 and closing at $53. This green candlestick completely covers the red candlestick’s body, forming a Bullish Engulfing pattern. If volume is also increased, this is a strong signal to consider a Call option.

Bearish Engulfing Example:

Now, consider a stock in an uptrend. The first candlestick is a small green body, closing at $100. The next candlestick is a large red body, opening at $100.50 and closing at $97. This red candlestick completely covers the green candlestick’s body, forming a Bearish Engulfing pattern. Increased volume would reinforce this bearish signal, potentially indicating a Put option.

Common Mistakes to Avoid

Trading Without Confirmation: The most common mistake is entering a trade immediately after identifying the pattern without waiting for confirmation. Patience is key.
Ignoring the Trend: Engulfing patterns are reversal patterns; they are most effective when trading *against* the prevailing trend.
Small Engulfing: The engulfing candlestick must significantly engulf the previous candlestick’s body. A partial engulfing is less reliable.
Sideways Markets: These patterns are ineffective in sideways or ranging markets. They require a clear trend to function properly.
Ignoring Volume: Low volume can invalidate the pattern.

Risk Management in Binary Options Trading

Regardless of the pattern you’re trading, proper Risk Management is crucial. Here are some guidelines:

Invest Only a Small Percentage of Your Capital: Never risk more than 1-5% of your trading capital on a single trade.
Use Stop-Loss Orders (where applicable): While not directly applicable to all binary options, understand the inherent risk of the option expiring out of the money.
Diversify Your Trades: Don’t rely solely on Engulfing patterns. Combine them with other technical analysis techniques and trading strategies.
Understand Your Broker’s Terms and Conditions: Be aware of any limitations or restrictions imposed by your broker.

Integrating Engulfing Patterns with Other Strategies

Engulfing patterns work best when combined with other trading strategies. Consider these combinations:

Fibonacci Retracements: Look for Engulfing patterns forming at key Fibonacci retracement levels.
Support and Resistance Levels: As mentioned earlier, Engulfing patterns forming at key support and resistance levels are stronger signals.
Chart Patterns: Combine with other Chart Patterns such as Head and Shoulders, Double Top/Bottom, or Triangles.
Price Action Trading: Engulfing patterns are a core component of price action trading.
Breakout Trading: Look for engulfing patterns after a breakout from a consolidation pattern.

Advanced Considerations

Engulfing Pattern Variations: There are variations of the engulfing pattern, such as the “inside bar” engulfing, which involves a smaller candlestick completely contained within the body of the engulfing candlestick.
Multiple Timeframe Analysis: Analyzing the pattern on multiple timeframes can provide a more robust signal.
Psychological Factors: Understanding the psychology behind the pattern—the shift in sentiment from bearish to bullish or vice versa—can help you make more informed trading decisions.

Bullish vs. Bearish Engulfing - Quick Reference
Feature	Bullish Engulfing	Bearish Engulfing
Trend Preceding Pattern	Downtrend	Uptrend
First Candlestick	Small-bodied Bearish (Red/Black)	Small-bodied Bullish (White/Green)
Second Candlestick	Large-bodied Bullish (White/Green) - Engulfs Previous	Large-bodied Bearish (Red/Black) - Engulfs Previous
Signal	Potential Reversal to Uptrend	Potential Reversal to Downtrend
Binary Options Trade	Call Option	Put Option
Volume	Increased Volume Desirable	Increased Volume Desirable

Conclusion

The Bullish and Bearish Engulfing patterns are valuable tools for binary options traders. By understanding their formation, interpretation, and confirmation techniques, you can significantly improve your trading success rate. Remember to always practice proper risk management and combine these patterns with other technical analysis strategies for optimal results. Mastering these patterns takes practice and patience, so continue to study and refine your skills. Further learning on Trading Psychology and Market Sentiment will also prove beneficial. Don't forget to also study Japanese Candlesticks patterns for a broader understanding.

Start Trading Now

Register with IQ Option (Minimum deposit $10) Open an account with Pocket Option (Minimum deposit $5)

Join Our Community

Subscribe to our Telegram channel @strategybin to get: ✓ Daily trading signals ✓ Exclusive strategy analysis ✓ Market trend alerts ✓ Educational materials for beginners