Engulfing candlesticks are one of the most powerful and reliable candlestick patterns in forex trading. They are formed when a small-bodied candle is followed by a larger-bodied candle that completely engulfs the previous one. This pattern indicates a strong change in momentum and is often used by traders to identify potential trend reversals.
In this article, we will discuss how to trade engulfing candlesticks in forex using a mentor’s guidance. Following these steps can help you improve your trading skills and achieve better results.
1. Understand the basics of engulfing candlesticks
To trade engulfing candlesticks effectively, it is crucial to understand the basics of this pattern. As mentioned earlier, engulfing candlesticks are formed when a small candle is followed by a larger candle that completely engulfs the previous one. The larger candle can be bullish or bearish, depending on the direction of the market.
A bullish engulfing pattern is formed when a small bearish candle is followed by a larger bullish candle that completely engulfs the previous one. This pattern indicates a potential uptrend reversal. On the other hand, a bearish engulfing pattern is formed when a small bullish candle is followed by a larger bearish candle that completely engulfs the previous one. This pattern indicates a potential downtrend reversal.
2. Identify engulfing candlesticks on the chart
The next step is to identify engulfing candlesticks on the chart. You can use any charting software to do this. Look for small candles followed by larger candles that completely engulf the previous one. Once you identify an engulfing candlestick pattern, mark it on the chart.
3. Confirm the pattern with other indicators
Engulfing candlesticks are powerful patterns, but they should be confirmed with other indicators before taking any trading decisions. You can use technical indicators such as moving averages, oscillators, or trend lines to confirm the pattern. If the engulfing pattern is supported by other indicators, it is more likely to be reliable.
4. Determine the entry and exit points
Once you have identified an engulfing candlestick pattern and confirmed it with other indicators, the next step is to determine the entry and exit points. You can use various entry and exit strategies depending on your trading style and risk tolerance.
One common strategy is to enter the trade after the engulfing candlestick pattern is formed and the price breaks above or below the high or low of the pattern. You can place your stop loss below the low of a bullish engulfing pattern or above the high of a bearish engulfing pattern. You can also set your take profit target based on your risk-reward ratio.
5. Manage your risk
Trading engulfing candlesticks can be profitable, but it also involves risks. To manage your risk, you should always use proper risk management techniques such as setting stop-loss orders, using appropriate position sizing, and avoiding overtrading.
Engulfing candlesticks are powerful patterns that can help traders identify potential trend reversals. However, it is important to understand the basics of this pattern and confirm it with other technical indicators before taking any trading decisions. By following the steps discussed in this article and seeking guidance from a mentor, you can improve your trading skills and achieve better results.