An engulfing pattern has two candles. The second body completely covers the first body. It's a takeover.
Bullish engulfing
After a decline: a small red candle, then a big green candle whose body swallows it. Buyers overpowered sellers.
Bearish engulfing
After a rally: a small green candle, then a big red candle that swallows it.
Wick says
The engulfing candle is Pac-Man. The bigger the bite, the stronger the signal.
Pro tip
Strongest when the engulfing candle also takes out the previous candle's wicks and appears right at support or resistance.
Rookie mistake
Calling every big candle "engulfing". The second body has to cover the whole first body, and direction must flip.
Key takeaways
- Second body fully covers the first, in the opposite colour.
- Bullish after declines, bearish after rallies.
- Location at a key level makes it far stronger.