Engulfing Bars
Engulfing bars are another very powerful price action signal, similarly to the Pin bar, these engulfing bars can be very profitable when played from key levels or other areas of confluence.
An Engulfing bar is generally a 2 bar set up where the second bar fully engulfs the proceeding bar although it can engulf more than 1 bar.
Engulfing bars can be bullish or bearish, they are called engulfing bars as they completely engulf the previous candle. i.e. the high of the engulfing bar is higher than the high of the previous bar and the low of the engulfing bar is lower than the low of the previous bar.
Engulfing bars can signal a trend reversal or a continuation of the current trade.
The anatomy of an Engulfing bar:
- A bullish engulfing bar is often referred to as a BUEB.
- A bearish engulfing bar is often referred to as a BEEB.
For a bullish engulfing bar, we would look for the price to close towards the top of the candle and for a bearish engulfing bar we would look for the price to close towards the lower end of the candle.
When a BUEB forms, we would look to take a long position and buy, similarly, when a BEEB forms, we would look to take a short position or sell.
Engulfing bars show strong moves in the price and so we want to be looking for them to form at important levels and trade with the direction that they are indicating, thus giving us the edge over the market.
In summary, the following describes a good Engulfing bar set-up:
- The latest bar must full engulf the previous candle (body and tails).
- The engulfing bar should form at an important level such as a support or resistance level.
- The engulfing bar should be a large bar, showing a strong move.
Some examples below show engulfing bars:
The chart below is the weekly chart for the USD/JPY it is a good example of how Engulfing bars can identify continuation trades.
Around mid 2007 a downtrend begins as price breaks down after the 1st BEEB forms and continues lower to form a new lower low. Price then struggles higher into resistance before forming the 2nd large BEEB. Price proceeds lower before pulling back into resistance again and forming the 3rd BEEB. From this 3rd BEEB a significant fall is halted when a large protruding pin bar forms and price breaks up above the downtrend line.
The Chart below is the Daily chart for the AUD/NZD for 2014 it is a good example of Engulfing bars indicating trend reversal.
The AUD/NZD has broken down below its 2008 low and is in a sideways pattern. Initially a pin bar reverses the fall before price hits resistance and forms a bearish pin bar. Price falls again and as it reaches the previous support level, it fires off a BUEB. Price ranges for a while before firing off a second BUEB which pushes the price higher again.
Entry and placing your Stop loss:
In summary:
Trades taken from these set ups at the right areas can have great results and can prove to be as reliable as the Pin bar when traded correctly.
Experience will allow you to quickly and easily identify these set-ups and you will be able to filter out the lower probability examples and trade only those which meet the criteria for a good Engulfing bar set-up.
Note:
Despite being one of the more reliable high probability Price Action signals, nothing is guaranteed, markets can reverse sharply due to events happening around the world and data releases etc. Sometimes your trade will close you out for a loss and others you will win.
However, being patient and trading only the high probability price action signals that form at an area confluence, we are going to dramatically increase the number of winning trades and cut the number of losing trades. Combining this with a strictly followed risk management technique and you will have a very powerful tool in your toolkit.
Important:
Risk management is the key to growing your account, without it, no matter how much luck shines on you, eventually your account will be wiped out.
There are 3 things here that will dramatically change the outcome of your trading decisions, they are:
1. Only take the high probability trades, the ones we discussed earlier where the Pin bar has formed at an area of confluence.
2. Use risk management to manage the amount you are prepared to lose on any trade. This amount should be a small percentage of your account size, generally no more than 1 to 2 %. It is something that should be adhered to no matter how promising a trade set-up is looking. I intend to add trade size calculator in due course.
3. Have respect for money! – Draw some cash out of the bank, just 5 or 10 notes and look at it once in a while. It is too easy to forget the monetary value of the numbers on your spread bet account. What might look like a relatively small amount to you on your screen, could actually be the weeks shopping or a tank of gas.
Remember:
There is no need to lose large sums of money when learning to trade forex, so practice on a demo account until you can consistently grow that account before thinking of going live with a real account.