In this post you’ll learn to spot an Engulfing Candlestick Strategy Pattern, to get into early trends (before others) whether trading Forex, Futures, stocks or e-minis. Also works on day trading and swing trading time frames.
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Welcome to part two on this series of Engulfing Candlestick Strategy Pattern. This really applies to any market that you can plot on a chart. If you missed Part One, you can go back after this one, and view it here. I want to thank everybody for your comments on the previous post. I’m going to address a couple of those comments right now, and show you how to take what I shared with you last time, and make it even better!
Engulfing Candlestick Strategy Pattern
We’re still going to use the Engulfing Candlestick Strategy Pattern, but now we’re gonna add something else to it. Let me show you what we’re gonna do and why. In Part One, I demonstrated that you can have engulfing patterns that are more than just two bars. Traditionally in Candlestick Analysis, a Candlestick Pattern is a 2 bar reversal pattern at highs and lows.
The point is that engulfing candlestick patterns are very helpful, as one part of an entire trading methodology. To create a probability in your trading, you need a number of uncorrelated variables. No one thing, whether it’s price pattern – candlestick pattern in this case indicator moving average, no one thing gives you a probability scenario. You need a number of uncorrelated variables, so this is one piece of evidence as we read a chart.
I’m going to take you to the next step, and add another piece of evidence. Let’s add an indicator, and that indicator is going to be the good ol’ Bollinger Bands. I like to use two, and twenty – you can use other variables, but these are pretty much the standard. We’ll make that two, make this black, and will keep that at one. We’re not really going to refer to that too much today, but we’ll put it on there, and then we’ll make that two. (See video)
Engulfing Candlestick Pattern and Bollinger Bands
What extra information does this give us? It gives us a lot, so here’s what it gives in this particular case. One of the distinctions was, we had an Engulfing Pattern here, but notice what’s happening with the Bollinger Bands: they’re contracting. That’s not a great high probability scenario, in other words, it doesn’t give us a good time. There’s no extra signal there. One of the things I said in the previous video that we are looking for here is the Engulfing Pattern to happen on a lower high, within that channel.
The thing we’re gonna add today is the Bollinger Bands are expanding, so if you get into this trade, (I normally enter below the low of this bar), so I’d be getting in down here. So, that’s my set up bar, and the next bar is my entry bar, and I’d get in literally just one penny paper tape below the low of that bar. The Bollinger Bands are going up, and below it the Bollinger Bands are going down. They start expanding and what that mathematically indicates is that volatility is increasing in the market.
That’s my confirmation, that’s the one extra thing that I would look at. Obviously, we’d look for some other things as well. Notice, it happens to come right to the mid Bollinger Band, so we got a nice resistance there. If we go back to some of the previous examples, such as here, we got an engulfing pattern going up, but we don’t have for the Bollinger Band confirmation. Bollinger Bands are just kind of going sideways here.
Wrapping Up!
When we’re looking for an expansion of volume, we’ve had contraction during that yellow box. When you get contraction, that’s a low-volatility scenario, which often is accompanied by low volume, but not always. There is a cycle in the market between high volatility periods, and low volatility periods. We look for a lower high here, and then the engulfing pattern of multi bars, in this case 5, and the Bollinger Band expansion.
This is very important, not just down, but on the other side, you want to look for it going up, you need it both.
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