Introduction
The Engulfing Pattern is one of the most powerful and reliable candlestick reversal patterns used by forex traders to identify potential market reversals. Recognizing this setup can help you enter high-probability trades with confidence.
In this article, you will learn what the Engulfing Pattern is, how it forms, the ideal trading setup using the RSI indicator, where to place your stop-loss (SL), and how to plan your exit strategy effectively.
What is an Engulfing Pattern?
An Engulfing Pattern occurs when a smaller candlestick is immediately followed by a larger candlestick that completely "engulfs" the previous candle’s body.
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A Bullish Engulfing Pattern forms when a small bearish candle (red/black) is overtaken by a large bullish candle (green/white).
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The second candle opens lower than the previous close and closes higher than the previous open, showing strong buying pressure.
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It signals a possible reversal from a downtrend to an uptrend.
📈 Example Charts:
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EURCHF – One Hour Chart (27-04-2025)
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AUDCHF – One Hour Chart (17-04-2025)
Key Point:
The Engulfing Pattern is more powerful when it appears after a strong downtrend or near a key support level.
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| EURCHF Bullish Engulf Pattern AUDCHF Bearish Engulf Pattern |
How to Trade the Engulfing Pattern
Time Frame
✅ This strategy is adaptable across all time frames, offering flexibility for different trading styles. However, for the most reliable signals and optimal results, the 4-hour (H4) chart is strongly recommended.
Indicators
✅ Use the Relative Strength Index (RSI) with a 14-period setting to confirm momentum.
Trade Setup
✅ For a Buy setup, ensure the RSI is below 50.
✅ For a Sell setup, the RSI should be above 50.
✅ A valid Engulfing Pattern (bullish or bearish) must appear on the chart, confirming the trade opportunity.
Entry
✅ Enter the trade at the closing price of the engulfing candle.
Stop Loss
✅ For a Buy trade, place the stop loss just below the low of the engulfing candle minus the (Ask - Bid) spread.
✅ For a Sell trade, place the stop loss just above the high of the engulfing candle plus the (Ask - Bid) spread.
Take Profit
✅ Aim for a risk-to-reward ratio of 1:1.5.
✅ Example: If your stop loss is 30 pips, set your take profit target at 45 pips.
Conclusion
Mastering the Engulfing Pattern trading strategy can significantly improve your ability to catch market reversals early and maximize profitable opportunities.
By combining engulfing patterns with the RSI indicator, trading on the 4-hour chart, and managing your risk-to-reward ratio wisely, you can build a strong and consistent trading system.
Focus on confirmed setups, follow your trading plan, and always respect proper risk management for long-term success in forex trading.
