Technicals | Oct 15 2012
By Walker England, Trading Instructor
Spotting price reversals is one of the most difficult actions to master in the Forex market. Through chart analysis, traders can learn to identify candlestick patterns that are a natural tool for this task. Candle patterns can give visual insight into market psychology and can suggest changes in sentiment which is useful in finding a market reversal. With this idea in mind we will focus on recognizing and trading one of the markets most clear cut reversal signals, the bullish engulfing candle pattern.
What is a bullish engulfing pattern?
A bullish engulfing pattern is a candlestick pattern normally found at the end of a downtrend. Pictured above the pattern is created by interpreting the data of two completed candles. The first candle will depict the end of the currency pairs established weakness. The size of this primary candle can vary from chart to chart and is not directly pertinent to the pattern itself. Small candles such as dojis are considered preferable in this position though, as they can reflect market indecision in the current trend.
The second candle in the most important candle of the pattern and is considered the actual reversal signal. This candle is comprised of a long blue candle creating newupward price momentum. Ideally the high of this candle should extend well above the high of the previous candle. The further this secondary candle rises, the stronger our signal is considered. A new push of upward movement in this position on the chart, reflects new buyers overtaking the previous strength of the sellers.This action often precedes a continued rise in price with buyers looking to enter the market on new strength.
Uses in Trading
Once you are familiarized with identifying the bullish engulfing candle pattern it can then readily be applied to your trading. Above is an excellent example of the pattern in action on a daily EURGBP chart. From June 11th through July 20th the EURGBP declined as much as 401 pips. This descent in price concluded with the formation of a bullish engulfing pattern. This was our first opportunity to consider new buying opportunities prior to our current run up in price seen above.
Once a bullish engulfing pattern is found, traders had the option of considering a variety of entry mechanisms to place new positions. While it is not uncommon to see traders execute on a candle pattern alone, they can also be used in conjuncture with an oscillator such as RSI or a breakout strategy to give further confirmation of the reversal. The low of a bullish engulfing pattern can also be used as an area of support. Regardless of the method chosen to pick a market entry, traders may choose to place stop orders under this price level in the event that a bullish reversal fails and a lower low is made.
The views expressed are not FNArena's (see our disclaimer).
For real time news and analysis, please visit http://www.dailyfx.com/real_time_news
DailyFX provides forex news on the economic reports and political events that influence the currency market. Learn currency trading with a free practice account and charts from FXCM.
www.dailyfx.com
Disclaimer
Forex Capital Markets is headquartered at Financial Square 32 Old Slip, 10th Floor, New York, NY 10005 USA.
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before you decide to trade the foreign exchange products offered by Forex Capital Markets, LLC, Forex Capital Markets Limited, inclusive of all EU branches, FXCM Asia Limited, or FXCM Australia Limited, any affiliates of aforementioned firms, or other firms under the FXCM group of companies [collectively “FXCM Group”] you should carefully consider your objectives, financial situation, needs and level of experience. If you decide to trade foreign exchange products offered by FXCM Australia Limited you must read and understand the Financial Services Guide and the Product Disclosure Statement. FXCM Group may provide general market information and commentary which is not intended to be investment advice and the content of this email must not be construed as personal advice. By trading, you could sustain a total loss of your deposited funds and therefore, you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading in foreign exchange products. Foreign exchange products are only suitable for those customers who fully understand the market risk. FXCM recommends you seek advice from a separate financial advisor.
FXCM Group assumes no liability for errors, inaccuracies or omissions in these materials and does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. FXCM Group shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. This email is not a solicitation to buy or sell currency. All information contained in this e-mail is strictly confidential and is only intended for use by the recipient. All e-mail sent to or from this address will be received by the FXCM corporate e-mail system and is subject to archival and review by someone other than the recipient.”
Technical limitations
If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
