Engulfing Patterns

Engulfing Patterns

Engulfing Patterns

Engulfing patterns are a type of Japanese candlestick techniques.  Every trading platform in the world now offers the possibility of having their charts displayed in candles (that is, not only in bars or straight lines), so knowing these techniques offers a big advantage if you’re serious about binary options trading. One of the most important types reversal patterns visually presented as candlestick charts are the engulfing patterns. Like any reversal pattern, they can be either bullish or bearish, and in the rest of this article we will explain the differences between the two. Keep reading!

Engulfing Patterns | Bullish Engulfing Pattern

As implied by its name, this trend suggests that a security’s price movement is bullish. This type of pattern is usually followed by a declining trend of the price, suggesting that a low or even an end to the security’s decline has occurred. However, as usual in candlestick analysis, the trader must take the preceding and following days’ prices into account before making any major decisions regarding investments.

Engulfing Patterns | Bearish Engulfing Pattern

A bearish engulfing pattern should provide an indication of a future bearish trend. It accompanies an uptrend in a security’s price movement and is most likely signaling a peak or slowdown in its advancement. However, the same principle as with the bullish engulfing pattern applies – whenever a trader analyzes any candlestick pattern, it’s important for him or her, before making any decisions, to consider the prices during the days that precede and follow the formation of the pattern.

Engulfing Patterns | Long-Term Trading

Engulfing patterns function much better if the trades are long-term. Because of that, you would be well advised to fix an appropriate expiration date, maybe even consider the end of the month. Obviously, by choosing such expiration date you won’t necessarily have to wait one month. If the trade is opened in the second half of the month, you will actually wait less than two weeks. Taking into account the big return on investment binary options offer, waiting for two weeks shouldn’t be a problem.

One way to obtain more accurate prediction is to maybe use Fibonacci Numbers, measure the length of the whole engulfing pattern and buy put options on a retracement into the 61.8% level in a bearish engulfing or call options in a bullish one. You can also use engulfing patterns in combination with many other tools, such as Oscillators, for example (the alligator oscillator is a good example).

Engulfing Patterns | Conclusion

As stated at the beginning of this article, engulfing patterns are a very powerful tool, very popular and widespread among traders. There is a good chance that you will have to use and interpret engulfing patterns in your trading career, especially if you do long-term trading, so getting familiar with this tool would be a clever thing to do. Also, you can combine it with some other tools to improve their accuracy. Invest some time into learning about them and you won’t regret it!

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FURTHER READING:

1. Apparatus and process for calculating an option (Vergil L. Daughtery, III – 2006)
2. Trading By The Minute (J. Ross, 1994)
3. Trade Your Way To Financial Freedom (Van K. Tharp, 1998)
4. One Good Trade: Inside The Highly Competitive World Of Proprietary Trading (M. Bellafiore, 2010)
5. Empirical Case Study of Binary Options Trading: An Interdisciplinary Application of Telecommunications Methodology to Financial Economics (G Giunta, F Benedetto – 2012)

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Author: Ben Prescott
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