Patterns/ Two candles

Two candles 7 min read

Bullish engulfing

A down candle, then an up candle whose body covers it completely. Two periods in which the second undoes everything the first did. Whether that is a handover or a blip depends on what the two periods were part of.

What the shape is

Two candles. The first closes lower than it opened. The second opens at or below that close, and closes at or above the first candle's open — so its body swallows the first body whole.

The strict definition concerns bodies, not wicks. A second candle that covers the first candle's entire range including both wicks is a stronger version of the same thing, but the pattern as normally defined only requires the bodies.

What two periods like that record is a genuine reversal of short-term control: everything the sellers achieved in one period was undone in the next, and then some.

When it means something

Engulfing at the end of a declineIllustrative
Five candles of selling, then one period that erases the last of them entirely and closes near its high. The size of the second body relative to everything around it is the signal — this was not a normal period. What follows holds above it.

The reason this version carries more weight than a single-candle pattern is that it requires a full period of committed buying, not a wick. A hammer's tail can be a few minutes of panic. An engulfing candle's body is where the period actually closed.

The same shape, meaning nothing

Engulfing inside a rangeIllustrative
The same two-candle shape, in a chart that has been going sideways. It satisfies the definition exactly. It also means nothing, because in a range every few periods produce a candle that engulfs the last one — there is no trend for it to reverse.

This is the most common way engulfing patterns mislead. A reversal pattern needs something to reverse. In a sideways market the pattern fires constantly in both directions, and a rule that triggers on all of them does nothing but generate costs.

A reversal pattern with no trend behind it is not a reversal of anything.

Telling them apart

  • Is there a trend to reverse? Count the candles before it. Five or six one-way periods is a trend. A sideways drift is not.
  • How big is the engulfing body compared to recent ones? If it is the largest body on the visible chart, something unusual happened. If it is ordinary, nothing did.
  • Where did it close within its own range? Closing at the very top is a stronger statement than closing mid-range with a long upper wick.
  • Is it at a level? As always, this is what turns a candle into evidence.
The honest summary

The pattern is well defined and easy to spot, which is exactly why it appears so often in charts that go nowhere. The definition tests two candles; the thing you actually need to know — whether there was a one-way move for them to interrupt — is not part of the definition at all.

Terms used

Engulfing
A candle whose body completely covers the previous candle's body.
Body
The distance between open and close.
Range
A period in which price moves sideways between two levels.
Piercing line
The weaker version, where the second candle closes only past the midpoint — covered here.
Reversal pattern
A shape read as the end of a move — which requires a move.

Patterns are the easy half

Reading the chart underneath them is the part that decides whether any of this is useful. The Charts track works through levels, volume, trend and timeframes from the beginning.

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