Bullish engulfing on the chart. Candlestick pattern “Absorption”: how to use it in trading? Learn more about the Absorption pattern
One of the Price Action setups, engulfing pattern, is a pattern of a possible price reversal. Those traders who spend a long time in front of the monitor, watching the market, are very fond of MP - because of its reliability. The pattern is quite unambiguous and very little subject to subjective interpretation. That is why MP is perfect for stock exchange beginners and professionals.
Due to the contrast, MP provides the trader with a fairly high probability of a good, profitable entry into the market. The required components of this bright signal are 2 candles that follow one after the other (either bullish and bearish, or vice versa). In this case, the second candle surpasses the first in the size of its body, as if absorbing it.
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Fig.1
Bullish and bearish engulfing patterns
The following conditions are important for MP:
1.
The presence of a pronounced upward or downward trend, possibly short-term.
2.
The body of the second candle should be larger (absorb) the body of the first. Shadows may not be absorbed, in which case the signal is considered weaker.
3.
The body of the second candle should be contrasting in color with respect to the body of the first. Exception: very small body of the first candle ( dodge or close to it).
In Fig. 1 you see both versions of MP. Only the size of the body of the second candle is taken into account, not its shadow.
A bearish MP is most often represented by a small candle of any color (a dodge or a spinning top is possible), which is absorbed by a long black (red) candle. Bearish MP is of particular importance after a growing trend of sufficient length.
If the second candle has not completely absorbed the shadow of the first, this configuration is considered significant, but weaker.
Fig.2
A bullish MP appears in a falling market. First, a small red (black) candle (Dodge) is formed, which is absorbed by a large growing candle. The model shows a good reversal in case of a long downward trend.
Fig.3
Both bullish and bearish engulfing need confirmation ( gap, third white or red candle, etc.) There are such variations of the bullish engulfing model, where the confirming candle is presented as a component of the candlestick model.
A bullish MP is a signal about the fading of a downtrend, the likelihood of a rollback from it, and even a change in trend.
But a trader must take into account other factors that increase the effectiveness of MP - a quick entry using this signal does not provide a high probability of a profitable transaction. Those. The market professional is not interested in any takeover, but only in a model with additional features that strengthen it.
Other options and additions to the absorption model
Let's look at some important additions to MP:
1. Superabsorption - in this case, the smaller the body of the first candle, the more reliable the MT is considered. The signal is very strong when the size of the second candle is so large that its body absorbs not only the first candle, but even several previous ones.
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Use the absorption model correctly - luck will definitely smile on you!
These patterns - bearish engulfing or bullish - can be found quite often. However, this model, like any professional tool, provides for certain rules of use.
What are the reasons for a “bearish engulfing” on a chart or a “bullish engulfing” pattern? Why does a pattern bring profit in some cases, but turn into a loss in others? How can you track failed deals? Many traders ask these questions. Well, we will try to give the most comprehensive answers to them.
Figure " Absorption"(in English it is called engulfing pattern) is a figure that is displayed exclusively on Japanese bar charts. In turn, it contains two Japanese candles. At the same time, under its influence, the previous trend reverses. That is, this figure can be called a reversal. At the same time, the body of the first candle should be less than the same parameter of the second bar. After all, the latter needs to absorb the first candle. It is noteworthy that these candles have different colors.
TO main criteria that allow you to recognize bullish engulfing or bearish engulfing on a chart include:
- The bodies of the bars are of different colors. And in this case we are talking about full-fledged candles, dojis are excluded.
- The body of the second bar must completely take over the first body. As for the shadows, they can remain untouched. Since the Japanese pay great attention to the cost of closing and opening a session, it is necessary to take into account the requirements that apply to the indicator that signals that the second body is about to take over the first.
- Within the market there should be an active downward or upward trend.
According to the third absorption recognition criterion, two absorption models are classified. If the market is dominated by a downward trend, and a bullish bar appears that has completely absorbed the body of the bearish bar, then in this aspect we can speak of a bullish engulfing. When all processes in the market are concentrated on an upward trend, and a bearish bar appears, the body of which is absorbed by the previous bullish bar, then a bearish engulfing occurs.
Main features of an absorbing figure
All figures of Japanese bars have rather exotic names. But in this particular case, it is quite ordinary. Since one bar takes over the other due to its large size.
Often, a reversal after a figure forms a completely new and rather long-term trend. At the same time, it can be stretched out longer than its predecessor.
"Takeover" is a reliable and frequent pattern. At the same time, the degree of its reliability increases if the trader observes it in an overbought or oversold zone. You can track the latter using tools such as Bollinger Bands and Keltner Channels.
Important acquisitions
It is quite easy to record working absorptions. If we talk about the bullish absorption model, then at some period of time buyers turn out to be stronger than sellers and have the opportunity to block the previous bar of short sellers. True, at such moments you need to be extremely careful. Perhaps the market maker is looking for new victims and, given the insufficient experience of the vast majority of market players, deliberately places such a “trap” on the chart. In order not to fall into the networks he has set, it is necessary to identify places with a maximum expectation that will bring us profit. But how to find such zones?
The answer is obvious. They focus on supportive and resistant levels. Even if our luck does not smile on us and we encounter a stop loss, the world will not collapse. We will make up for lost time and even remain in profit due to future typical transactions.
Among the main nuances that affect the increase in the reliability of absorption, the following should be highlighted:
- The presence of a new minimum (maximum) value on the second bar of the model. If you come across such an indicator on the chart, then it has good reliability.
- Imbalance in the dimensions of the bodies possessed by the first and second bars of the model. Simply put, if the second bar is larger than the first, then the signal will be very reliable. In this case, the last bar can completely take over the previous ones.
- When the second engulfing bar is highlighted by a large volume, the indicator is also extremely reliable. It is best if it has an actual volume, which contains information about the amount of currency sold or purchased. In this case, the trader can count on objective data regarding volume. However, no one provides access to such information.
- If absorption occurs after a rapid movement has occurred. Then we can say that the market is oversaturated with purchase/sale transactions.
The Absorption candlestick pattern is the antipode of the Harami pattern in its structure. Just like Harami, “Engulfing” can often be found on price charts of different time frames. The model consists of two candles – long and short. In contrast to the Harami, the Engulfing begins with a short candle followed by a longer one, as if engulfing its predecessor. In the classical model, the second candle must absorb the first along with the body and shadows. However, in trading practice there are frequent exceptions when the shadows of the first candle may extend beyond the second.
A bearish engulfing usually consists of a medium or small white candle followed by a larger dark candle that engulfs the previous one along with its shadows. For forecasting, this model, formed on a bullish trend, is of great importance as a signal for a turning point. On a downward trend, this model may be ineffective, so there is no point in considering and taking it into account.
Bullish engulfing is formed exactly the opposite - a small dark candle is replaced by a long light candle that closes the previous one. Similar to a bearish pattern, a bullish pattern will only be effective at the end of a downtrend.
In both options for forming Absorption candlestick patterns, we can talk about using them independently. But figures with subsequent confirmation give a greater effect. As a rule, a bullish or bearish candle immediately following the pattern, as well as the formation of a window, can serve as confirmation.
Theoretically, confirmations of Absorption patterns can often move into the next pattern. For example, we can take a bearish engulfing confirmed by a bearish candle. As a result, a “Three days down” pattern was formed.
In the opposite situation, when a bullish pattern is formed with confirmation by a rising candlestick, a “Three days up” pattern is created. The only condition for the formation of new models based on “Absorption” is the closing of the third candle above/below the engulfing one.
Bullish Engulfing Candlestick Pattern ( Bullish Engulfing) is one of the main reversal signals. When generating this signal, the trader must clearly understand what is happening in the mood of market participants and what is causing the reversal. Long-term observations of Japanese traders recognized Bullish Engulfing as a signal with a very high probability of reversal.
Signal: bullish, strong.
Bullish Engulfing candlestick pattern. Anatomy.
The Bullish Engulfing candlestick pattern consists of two separate candles. Since both the signal and confirmation are contained in the second candle, we will consider it a confirmation candle.
First candle - installation candle. This is a bearish candle and preferably appears at the end of a significant downward price move.
Second candle - confirmation candle. It opens below the closing price of the previous candle and closes above the opening price of this candle. Thus, the green candle completely absorbs the previous red candle with its body. The opening and closing prices of these candles may be equal, but not both at once. In Forex, it often happens that the opening price of the setup candle is equal to the closing price of the confirmation candle.
Bullish Engulfing candlestick pattern. Criteria.
- The body of the second candle completely engulfs the body of the first candle. Shadows are not taken into account.
- Before this, prices were in a clear downward trend, even if it was a short-term downward movement.
- The body of the second candle is the opposite color of the first candle, the first candle has the color of the previous trend. The exception to this rule is if the engulfed candle is a doji or has a very small body.
Signal amplification.
- A large confirmation candle body and a small setup candle body. The previous candle shows that the trend is running out of steam. The large body of the next candle shows that the new trend has started with good strength.
- High trading volumes on an engulfing candle increase the chances that a reversal has occurred.
- If the body of the second candle absorbs both the body and the shadows of the previous candle, then the likelihood of a reversal increases.
- The larger the gap from the previous close, the greater the likelihood of a reversal.
Psychology and fundamental principles.
After a strong downtrend, the price opens lower than the previous candle closed. Before the candle closed, buyers seized the initiative and raised the price even higher than it opened the day before. The emotional psychology of the trend has been changed.
The Bullish Engulfing candlestick pattern forms at the bottom of the price movement. There are two possible scenarios here:
- This can occur at the end of a long-term downtrend that depletes the supply of sellers and attracts buyers into the market. At this stage, buyers will be more inclined to enter the market to offer the currency pair at relatively cheap levels. With one concerted effort that far exceeds the efforts of the sellers on the previous candle, the buyers defeat the sellers and reverse the direction of the price movement on one candle.
- The Bullish Engulfing candlestick pattern can also occur in an uptrend when the price temporarily rebounds, preferably towards a support level. This temporary downward movement may be due to some buyers taking profits, sellers appearing on the market at relatively inflated prices, or simply a normal cyclical decline in buy orders. Consequently, the price moves smoothly down to the support level, where buyers are ready to start buying again, pushing the price up.
Market entry and stop loss.
You can place either a buy stop order 2-5 pips above the high of the confirmation candle, or if you are confident enough that the price will move up, enter with a market order. In any case, yours should be 2-5 points below the minimum of the installation candle. This is only a rough guide: in volatile markets you can move your stop loss further, just like for higher time frames. For example, for a daily timeframe, the stop loss is set 5-20 pips below the low of the setup candle.
The larger the body of the bullish candlestick that confirms the Bullish Engulfing candlestick pattern, the more likely it is that the price will move up. However, if the candle is too long, you may have trouble using a reasonable risk-to-reward ratio.
For example, you may have to set a stop loss of 50-100 points so that it is below the low of the setup candle. And if there is a strong area of resistance from above within this distance, then the probability of trading decreases sharply, since the take profit should be set larger than the stop loss. You will have to miss this signal.
Candles and candlestick patterns are the pulse of the market, determining price action () and the sentiment of market participants, which is the driving force behind price action.
Candlestick analysis is one of the oldest and most proven types of technical analysis. Whereas, the candlestick engulfing pattern is the main pattern that underlies countless and. What is candlestick engulfing and how to use this model in trading is the topic of our article today.
Absorption and its technical analysis - what this candlestick pattern looks like
The “Absorption” figure, as a technical analysis model, looks like this: a candle is formed on the price chart, which with its dimensions overlaps one or even several candles in front:
Bearish and bullish engulfings
Most likely, you know who the bulls and bears are on the stock exchanges. Based on these definitions, bearish and bullish candlestick engulfings got their names, in which:
bearish engulfing is a candlestick pattern in which absorption occurs in the downward direction:
bullish engulfing is a candlestick pattern in which absorption occurs in the upward direction:
At the same time, bearish and bullish engulfing in two different situations can give completely opposite signals. It all depends on what part of the quote chart it occurred on.
Bearish and bullish engulfing – trend reversal pattern
So, first of all, technical analysis regards a candlestick pattern such as engulfing as a trend reversal pattern. That's right, this is exactly what bearish or bullish engulfing is talking about, but only if they occurred at the top or bottom of the trend, respectively. That is, if we are talking about a trend reversal, where bearish engulfing is a reversal figure, then at a minimum, this trend must exist. Not just a slight increase in price, but a trend in which there are at least 20-30 candles.
Conditions for the occurrence of a trend reversal pattern:
- The trend moved in one direction for a long time.
- Right at the top of the trend, or at its bottom, an engulfing occurred.
- The trend began to move in the opposite direction, that is, a trend reversal occurred.
Thus, if a bearish engulfing appears on the price chart of a rising trend, this indicates its future downward reversal:
And vice versa, if the trend was declining for a certain time, and a bullish engulfing appeared at its base, this candlestick figure indicates that the trend will reverse upward:
Bearish/bullish engulfing – pattern (figure) of trend continuation
The second signal that the engulfing candlestick pattern gives us is a signal about the continuation of the trend. Unlike the previous figure, a trend continuation pattern occurs in the middle of a trend movement at the end of a correctional wave, and signals that the correction has ended and the trend is resuming.
The conditions for the emergence of this model are as follows:
- The trend moved in one direction for some time.
- A correction wave appeared in the opposite direction of the trend.
- Further, the correction began to show signs of a reversal, and absorption occurred, which is the final stage of the trend exiting the correction.
- The trend came out of the correction and began to continue the previous movement.
Thus, bullish engulfing, as a trend continuation pattern, occurs on a growing trend at the end of a downward correction:
Accordingly, bearish engulfing, as a trend continuation pattern, occurs in a falling trend at the end of a growing correction:
It is important to know
And now, about some secrets that will help you use absorption models even more effectively:
- The older the timeframe on which the engulfing pattern occurred, the stronger the trading signal. Accordingly, the patterns on the M1 quote charts have no meaning at all, and the signals on W1 or M1 are the strongest signals. Typically, engulfing and the trading systems that underlie it are used on H4 quote charts
- Absorptions are figures that have value only in a trending market. There can be no trend reversal or continuation of the trend without the trend itself. Accordingly, do not try to find these candlestick patterns in a sideways (flat) market.
- If you are new to the Forex market, identifying engulfing patterns may be difficult for you at first. In order to easily identify candlestick patterns, we recommend using a special indicator. In the article to which this link leads, you will find three unique indicators that help you find , candlestick engulfings and figure .
- All of the above candlestick patterns will have even greater power if their formation is associated with other candlestick signals. For example, if, while conducting technical analysis, you identified a bearish engulfing within the correction of a falling trend, and it was preceded by a Doji candle. In this case, you first received confirmation that the growing correction is slowing down, the bulls’ strength is running out, and bearish engulfing will indicate to you that the downward trend will continue.
- Technical analysis of a trend reversal pattern will have additional confirmation if it occurs at a significant support/resistance level. To determine key support and resistance levels, we recommend that you use the appropriate indicators, which you can download.
- Technical analysis of the trend continuation model will have additional confirmation if the corrective wave hits the support/resistance level.
And all the above information and methods that you can apply when conducting your own technical analysis can easily become the basis for developing a real trading strategy for you. Test the execution of absorption on the history of quotes, and you will see how strong these candlestick signals are!