Reading candles
Engulfing bar
A candle whose body fully covers the body of the candle before it, in the opposite direction.
Tested more than once and no dependable profit survived costs.
Tests on stocks, index futures and EURUSD mostly find no reliable profit once costs are counted; the few positive results are in stock markets and depend on the exit rule. A pattern describes what price just did. It is not a forecast. A published tally for engulfing patterns reads well above a coin flip, but it counts which side of a small range price left and includes no costs.
What it is
A bullish engulfing bar follows a falling candle with a rising one whose body starts at or below the earlier close and ends at or above the earlier open. Bearish is the mirror. Wicks are not part of the definition.
What it suggests
One side took back everything the other side made in the previous period. In context, at a level after a move, it is a clear picture of a change in who was in control for that period.
How to check it
Confirm the second body covers the first, note whether it formed at a level, and check how big the pattern is against the average range so the stop is sensible.
Common mistakes
- Taking every engulfing bar regardless of trend or level.
- Ignoring that a very large engulfing bar means a very wide stop.
How we will test it
On public price history, never on anyone's account. Until it is done, the note above is all we can honestly say.
- Cases: an engulfing bar at a swing level in a trend
- Measure: share of cases where price closes beyond the pattern's far side first, and average R after costs
- Window: next 1 to 10 bars
- Compared with: the same measure at random bars in the same trend state
Sources
- Marshall, Young and Rose (2006), Candlestick technical trading strategies: can they create value for investors? Journal of Banking & Finance 30(8) (citation and headline finding only)
- Duvinage, Mazza and Petitjean (2013), The intra-day performance of market timing strategies and trading systems based on Japanese candlesticks, Quantitative Finance 13(7) (abstract or primary page read)
- Fock, Klein and Zwergel (2005), Performance of candlestick analysis on intraday futures data, Journal of Derivatives 13(1) (citation and headline finding only)
- Orquin-Serrano (2020), Predictive power of adaptive candlestick patterns in forex market: EURUSD case, Mathematics 8(5) (abstract or primary page read)
- Lu, Chen and Hsu (2015), Trend definition or holding strategy: what determines the profitability of candlestick charting? Journal of Banking & Finance 61 (citation and headline finding only)
- Bulkowski, thepatternsite.com pattern statistics (US stocks; a private investor's tallies, not peer reviewed; his 'reversal rate' counts which side of a small range price exits, so 50% is the baseline) (abstract or primary page read)
Related lessons
Written in our own words. Education only, not financial advice.