Engulfing patterns are made up of multiple candles, and are aptly named as one candle "engulfs" the previous candles. There are bullish and bearish equivalents to this pattern. A bearish candle "engulfs" the body of the previous bullish candle:
The bodies of the engulfing candles completely overlap the bodies of the prior candles, showing that the opposing party (bears vs bulls) has regained market dominance for the time being.
General Identification & Interpretation
Steve Nison is credited with bringing Japanese candlestick charting to the West. In his book "Japanese Candlestick Charting Techniques" he describes bearish engulfing patterns with the following characteristics:
Typical characteristics
The body of the second candle must engulf the body of the first candle
The candles must be opposite colors (except if the first candle is a doji)
For the engulfing pattern to indicate a reversal, the pattern must occur after a clear uptrend (for the bearish engulfing pattern to signal a potential bearish reversal)
Examples of use as a trading indicator
Potential reversal signal after significant market movements
Support or resistance levels (support at the low end of the bullish engulfing patterns, resistance at the high end of the bearish engulfing patterns)
Other interpretations
The engulfing candlestick pattern can also "engulf" more than one candle
More for beginners
Check out our quick start guide to candlestick charting for more information if you are new to candlestick charting!
