We have seen single candle patterns like the hammer and the Shooting Star. Single candles can give important
information about supply and demand simply through the colour, the length of the real body and the length
of the shadows.
Now we're going to analyze combinations of individual candles. The engulfing pattern is a major reversal
signal with two opposite colour real bodies.
In this lecture we are focusing on the bullish engulfing pattern,
so let's have a look at the properties. As I have already said it is a two candle pattern.
The market then must be in a downtrend.
This is the most important condition and this time is not the last one because we need it to understand
the other conditions.
So the first candle must be red, in line with the previous trend that is down.
The second candle must be green,
with a real body that surrounds, or we can say engulfs the real body of the first.
Last one, the position of the shadows on either candles doesn't matter.
What's the logic behind this pattern?
We have a first candle that is confirming that sellers are in control of the markets.
Traders are expecting then and another red candle, in line with the downtrend.
But here it comes a long
green candle that engulfs the previous one, showing that buying pressure has overwhelmed selling pressure.
Here we have United States dollar Japanese yen on a hourly chart and you can see that the price is going
down.
So sellers are in control in the first part of the chart.
At the end of this downtrend there's a bullish engulfing pattern.
So analyzing the price action on the market, we can say that sellers were in control and they pushed
the price down for a long time without facing any major resistance by the buyers.
At one point, we can see a bullish engulfing pattern that is basically telling us that buyers
had a strong reaction compared to the previous session.
So the bullish engulfing pattern is a clear signal that the demand increased maybe because the price
is too low and buyers find convenient to buy.
Now that you know the bullish engulfing pattern,
can you imagine how the bearish engulfing pattern is? We'll see it in the next lecture.