The Engulfing Candle is considered one of the most influential candles to indicate a trend reversal. Price action trading is closely related to identifying trend reversal for which price action traders give value to engulfing candles a lot. In today’s lesson, we are going to demonstrate an example of an engulfing candle, which does not work in favor of the traders. We try to find out the reason behind that.
The chart shows that the price heads towards the South with good bearish momentum. On its way, it makes a breakout and trades below the level for one more candle. The sellers are to keep an eye on this pair for the price to consolidate and produce a bearish engulfing candle closing below consolidation support. Do not miss the point ‘closing below consolidation support’.
The price does not consolidate. It instead produces another bearish candle. It may consolidate now. A candle like this attracts more sellers to go short on the pair. Let us proceed to the next chart.
The chart produces a bullish inside bar. This means the chart is still bearish biased. The signal candle may come out at any time. The waiting game gets intense. The sellers are to keep checking the chart since the next candle may be the signal candle.
The chart makes them wait further. It produces a bearish inside bar followed by a bullish engulfing candle. The chart is still bearish biased, but the chart may get choppy as well if the next candle comes out as a bullish candle. Let us wait and find out how the next candle comes out.
The next candle comes out as a bearish engulfing candle. Is this what the sellers want? Here is a question for you. Would you trigger a short entry?
If the answer is no, you are right. The reason behind that is this is an engulfing candle, but it does not close below consolidation support. Look at the line below. This is where both candles get rejection. Thus, we may consider this one as consolidation support. Even if we consider only their bodies (not the best way), the candle closes within that level as well. The equation is an engulfing candle does not make a breakout. Thus, traders may skip taking this entry. We need to make sure these four things are there before taking entry based on this setup.
- Clear trend
- Engulfing candle
If a trade setup misses any one of these, be patient. Let it go.