The Top Japanese Candlestick Guide: What is an Engulfing Pattern and How to Trade It?

Jasper Osita - Market Analyst

2025-07-02 13:10:54

Goal of This Lesson

To help traders understand the logic, psychology, and strategic application of bullish and bearish engulfing candles, when they matter, how to use them in confluence with higher timeframes, and what to avoid when executing trades based on them.

Real-Life Analogy

Imagine you're watching a tug-of-war match. At first, one team is slowly pulling the rope their way—showing strength. But suddenly, the other team digs in, anchors down, and yanks the rope so forcefully that they pull the flag completely past center.

That sudden reversal of control? That’s an engulfing candle.

It’s not just a small win—it’s a full reclaim of momentum, where the dominant side doesn’t just respond—they overpower.

What Is the Engulfing Pattern?

An Engulfing pattern is a two-candle reversal formation where the second candle completely engulfs the body of the first one.

Types:

Bullish Engulfing

Appears after a downtrend. The second candle (bullish) closes above the open and previous candle’s high.

Bearish Engulfing

Appears after an uptrend. The second candle (bearish) closes below the open and previous candle’s low.

It shows a complete shift in momentum and is most effective when formed after a move into liquidity or near key zones.

Why Does the Engulfing Pattern Work?

The power lies in market psychology:

The first candle represents a weak continuation of the existing trend.
The second candle traps weak hands and completely reverses the prior session's gains or losses.
It reflects a liquidity sweep and displacement, showing institutional momentum taking over.

Engulfing candles often represent order blocks, BOS (Break of Structure), or MSS in smart money terms.

Note: Base the engulfing on a body-to-body engulfing basis.

Where to Look for Engulfing Patterns

Engulfing patterns become high-probability signals when found:

At key support/resistance levels
Around Previous Day Highs/Lows, Session High/Low, or Quarters
After a liquidity grab or sweep
Near Fair Value Gaps (FVGs) or Order Blocks
Following a clear trendline break or market structure shift

As long as it’s a key level, this could be an opportunity to trade the Engulfing Pattern.

Check this out for key level reference:

The SMC Playbook Series Part 1: What Moves the Markets? Key Drivers Behind Forex, Gold & Stock Indices

The SMC Playbook Series Part 2: How to Spot Liquidity Pools in Trading-Internal vs External Liquidity Explained

How to Trade the Engulfing Pattern (The 3-Step Strategy)

Step 1: Start with the Higher Timeframe Bias (Daily or H1)

Identify trend direction
Mark available key levels

Step 2: Spot the Engulfing at a Key Level

Wait for a Bullish Engulfing at support / liquidity zone
Wait for a Bearish Engulfing at resistance / liquidity sweep
Do not trade mid-range engulfing patterns. They are low quality.

Step 3: Drop to a Lower Timeframe for Entry

Look for:

Break of Structure (BoS) or MSS in your direction
Lower TF FVG or internal engulfing candle
Breakout of the engulfing candle’s high/low + retest

Target Techniques

2x-3x Target
Psychological Numbers
Previous Resistance Levels
Keep following the Engulfing Patterns as it emerges along the way, following the trend.

Pro-Tip/s:

Wait for Candle Closure
Wait for a Range Breakout on Lower Timeframes

What to Avoid When Trading Engulfing Patterns

Trading in consolidation or chop: No follow-through = fakeout city
Taking entries before the candle closes: Let the pattern confirm first
Ignoring higher timeframe bias: Engulfing against trend = riskier setup
Forcing it without context (like at random spots): Must align with a level, liquidity grab, or structure shift
Over-relying on a pattern without volume, session timing, or market context

Tips to Trade Engulfing Patterns Like a Pro

Always wait for the engulfing candle to CLOSE
Use with structure: trendlines, swing points, or liquidity zones
Trade them during high-volume sessions (e.g., London Open, NY Open)
Use alerts for HTF key levels, then drop to LTF for execution
Don’t chase — if price runs after engulfing, wait for a pullback to OB/FVG
Backtest: Build confidence with 50–100 screenshots

Final Thought

The Engulfing Pattern isn’t just a visual signal it’s a story of rejection, reversal, and real money stepping in. When aligned with structure, liquidity, and time-of-day context, it becomes a weapon in your confirmation model toolbox.

Master it, and you’ll no longer chase price you’ll trade with intent.

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This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplies by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.

Autor

Jasper has been in the markets since 2019 trading currencies, indices and commodities like Gold. His approach in the market is heavily accompanied by technical analysis and of course, supported by fundamentals. He has a background in trading proprietary firms and has been teaching students how to navigate themselves in the markets from basic to advance concepts.

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The Top Japanese Candlestick Guide: What is an Engulfing Pattern and How to Trade It?

Goal of This Lesson

Real-Life Analogy

What Is the Engulfing Pattern?

Types:

Bullish Engulfing

Bearish Engulfing

Why Does the Engulfing Pattern Work?

Where to Look for Engulfing Patterns

How to Trade the Engulfing Pattern (The 3-Step Strategy)

Step 1: Start with the Higher Timeframe Bias (Daily or H1)

Step 2: Spot the Engulfing at a Key Level

Step 3: Drop to a Lower Timeframe for Entry

Target Techniques

What to Avoid When Trading Engulfing Patterns

Tips to Trade Engulfing Patterns Like a Pro

Final Thought

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