Countdown Test

00days 00hours 00minutes 00seconds 2020-12-25 12:00 AM     00days 00hours 00minutes 00seconds 2020-10-25 12:00…

Continuing with my series of powerful candlestick patterns, today we are going to be looking at the Engulfing Candlestick formation.

With my proficiency in technical analysis, I am choosing to share key points that find to be the most useful in real life trading…

I am an avid believer in technical analysis. So I am not going to waste anyone’s time with things that get too complicated to even be useful…

I base all of my trades off technicals, but at the same time… I believe in keeping it simple.

Simple yet powerful…

Sit tight and I will show you how it’s done…

 

Identifying the Engulfing Candle


The engulfing candlestick pattern is a two-candle reversal pattern.

The body of the second candle fully engulfs the body of the first candle…  in the opposite direction. So a red candle will be engulfed by a green candle and vice versa…

Tails don’t matter here, all we are concerned with are the bodies of the candles.

For a bullish engulfing pattern to form, the stock must gap down on the second day of the pattern, to open below the first day… it must then close above the high of the first day candle body…

If the price does not gap down, the body of the white candlestick would not have a chance to engulf the body of the previous day’s red candle.

Engulfing Candle Key Points:

  1. Two candle formation
  2. The second candle fully engulfs the first in the opposite direction
  3. Opens below, closes above
  4. Wicks don’t matter

 

Significance


With a bullish pattern, because the stock both opens lower than it closed on Day 1 and closes higher than it opened on Day 1, the green candlestick represents the sellers owning the morning only to have the buyers take over in a decisive manner…

The green candlestick of a bullish engulfing pattern typically closes at or near highs of the day… so you will see only a small wick if any…

Looking for strength on a reversal candle like this is key… so the stronger it closes the better.

This confirms the strength of the buyers, and a shift of momentum.

Added Significance:

  1. How many candles it engulfs- the more candles the more powerful
  2. Forms at support or resistance- extra significance in the turn
  3. Volume- more volume signifies the interest in the move

 

Trading with the Engulfing Candlestick Pattern

 

Ultimately, traders want to know whether a bullish engulfing pattern represents a change of sentiment, and whether they should buy the stock.

Check out the chart below, here a bullish engulfing candlestick pattern forms. As you can see the white candle to the far right opens below the red candle and closes above…

 

So does this signify a potential trend reversal?

Let’s check out the next chart…

 

 

Clearly this engulfing candle was the beginning of a very nice trend reversal.

Couple things in this formation to take note of…

The engulfing candle was quite a bit bigger than the red candle and it also closed strong. This puts more significance on the candle strength…

Next a really great added benefit to the potential trade… this pattern formed right at a key support level.

The stock was already having trouble continuing lower here… so when the reversal pattern formed, there was that added level of protection.

So there are a couple ways people like to trade this…

If volume increases along with the price, aggressive traders may choose to buy near the end of the day of the bullish engulfing candle…

In this case they are anticipating the upward momentum to continue the following day.

While more conservative traders may wait until the following day. They want to make sure the engulfing candle closes strong…

And the next day they will be looking for more upward momentum before placing a trade. begun.

An engulfing candlestick pattern is a signal of a potential trend reversal… it is in no way a buy signal on it’s own, even if some traders use it like that… many have created strategies around the engulfing pattern.

But those strategies have added factors based on back testing, they aren’t just jumping in.

So it’s important to trade based on your setups and any other indicators that are part of your system…

By using candlestick patterns like the engulfing candlestick in conjunction with your trading system, you can potentially get more confirmation and up the odds in your favor…

For a setup like the one above, I would also be looking at the RSI… as you can see it is oversold and gaining support there on the chart…

You can also see the MACD is beginning to cross up there… along with all of that I would also look at a few simple moving averages for confirmation…

So as you can see candlestick formations are great tools, but should be used with other indicators as well.

Get more detailed training on my specific setups and how I use them to consistently profit in live trading.

 

JOIN NOW

Author: Petra Hess

Believe it or not, something as simple as a single candlestick can make a huge difference to your trade setups working or not.

I’m not talking about any candlestick of course… I am referring to the Inverted Hammer.

I have over a decade of experience using technical analysis in trading and have become quite proficient…

And while I have been through the ups and downs of all the many different ways to trade, in the end… I am an avid believer in technical analysis.

So much so that I base all of my trades off technicals.

You’ve got to be wondering… How can a single candle be so powerful?

Well, sit tight and I will show you…

 

Identifying an Inverted Hammer

The Inverted Hammer candlestick formation, comprised of a single candle, is commonly found at the bottom of downtrends.

It is easily identified by a small lower body and a long upper wick which is at least two times as large as the body.

The body of the candle should also be at the low end of the trading range and in contrast to the large upper wick… there should be little to no wick on the lower end of the candle.

Inverted Hammer Criteria:

  1. The upper wick should be at least two times the length of the body.
  2. The candle body is at the lower end of the trading range.
  3. There should be little to no lower wick.

 

Importance

At the end of a long downtrend, an Inverted Hammer is bullish because it is showing a hesitation in the downward pressure.

The candle is showing buyers coming in to test the selling pressure in the stock.

The long upper wick of the candlestick pattern indicates that the buyers drove prices up but the selling pressure was too much and prices back down to close near the open.

For the inverted hammer to have any significance at all… the buyers must come in the next day to take over. Otherwise it was simply a battle the bulls lost.

But keep in mind it’s simply a warning of potential trend change, not a signal to buy.

 

Added Significance:

  1. Price gaps down on the day the inverted hammer is formed.
  2. Longer upper wicks.
  3. Look for price to gap up and trade strong the day after it forms.

 

Using the Inverted Hammer

At the end of last year, Facebook (FB) was in a clear downtrend….

 

 

I used the yellow oval in the chart to highlight an inverted hammer candle pattern…

Potential trend reversal?

Take a look at what happens next:

 


How’s that for a trend reversal?

Now that you see the significance… let’s get up close and personal with this candlestick pattern.

Below I zoomed in on the chart to get a closer look at the actual candlestick… you can see more clearly what it actually looks like…

Let’s see:

  1. The upper shadow should be at least two times the length of the body – Check!
  2. The candle body is at the lower end of the trading range – Check! Check!
  3. There should be little to no lower wick – Check! Check! Check!

And there we have it… an Inverted Hammer.

 

 

So we just jump right into the stock now?

Of course not… it’s just a candlestick.

An inverted hammer is a signal of a potential trend reversal… it is in no way a buy signal on it’s own.

It’s important to trade based on your setups and any other indicators that are part of your system…

By using candlestick patterns like the inverted hammer in conjunction with your trading system, you can potentially get more confirmation and up the odds in your favor…

… it’s not a replacement or stand alone by any means…

 


Here is how I would use my favorite trading setups in this chart.

FB is in a downtrend, it then starts making a rounded bottom pattern.

Enter the inverted hammer and now I have an extra signal that doesn’t occur in all of my trades…

You see, FB could make the rounded bottom without an inverted hammer, and still signal a trade for me…

I wouldn’t take a trade based only on the inverted hammer candle, but seeing it in conjunction with my profitable trade setups is gravy…

Next I would want to see the 8 EMA cross above the 20 SMA, which is marked by the first blue oval.

Once that occurs, I am watching for the price to stay above the 8 EMA and I marked the buy entry area in grey square on the chart…

Being in the trade one last signal to confirm the potential of a nice move up is marked by the second blue oval when the 20 SMA crosses above the 50 SMA.

In conclusion, the inverted hammer is a great tool, but it should only be used in conjunction with your trusted trade setups.

If the chart had not set up according to the pattern that I trade consistently, I would not be looking at a trade in FB there… regardless of the inverted hammer.

The inverted hammer was just an added confidence booster when my pattern did finally set up.

Get more detailed training on my specific setups and how to use them in live trading.

 

JOIN NOW

Author: Petra Hess

Well, it’s Halloween. The time of year when you have to look out for frights and scares around every corner…

While I can’t help you with those fears… I can help you with your fears about trading.

You see, when it comes to trading… some people are just waiting for a scare around every corner, never knowing when it might be…

This will paralyze a trader, making it impossible to pull in profits no matter what they do.

Trading doesn’t have to be scary. In fact, it shouldn’t be scary, and I will show you why.

 

Trading Isn’t Scary

 

Just like in any sport, a lot of traders I know are superstitious…

This comes from the fact that they place some sort of human quality in the markets.

While the players in the market are human… the market itself is not…

The big players in the markets aren’t emotional and don’t see the market as anything but supply and demand… well, they also see a bunch of little guys, who do let the market get at them, to take advantage of…

Around every corner, the market is just waiting to pounce on you right?

Wrong!

The market isn’t alive… it doesn’t know you or your fears.

So why are you so fearful?

Well, it’s because you have misplaced the blame onto the market.

You see, it’s YOU that you should fear… not the market.

How so?

Well, you created these fears in your head.

You get stopped out, and the stock moves back up to hit your target…

Did the market do this just to hurt you? Show you who’s boss?

Of course not…

You did it… you put your stop exactly where all the other retail traders put their stops and the big guys swiped all of you… suckers

To make it as a trader you have to keep a clear mind… and simply be logical…

That way you won’t see the market as “getting you”… you will be able to see the truth and make adjustments.

Next time you will be more aware of what the average retail investor is likely doing and use that to your advantage.

If you think logically, you can trade fearlessly like the big dogs…

And that is all you need to take the fear out trading the market

 

How to think logically and be fearless

 

Start thinking in a simple way, and stop assuming.

Human behavior is a key part of the market, so try to learn a little about it, but keep it simple.

You see, stocks need to “breathe.”  So many times people think a stock should easily trade to a price target for whatever reason…

For example, It beat earnings and it’s headed to $100… 

You buy the breakout on earnings… next stop $100, right? That’s black and white… but that’s not the market.

So first it spikes to $98, with a quick retrace to $94, only to head up to $99, and then roll down to $97… maybe 2 days later it hits $100.

What happened?  You may have been stopped out even though it hit your target… even worse, you may have gotten whipped around losing multiple times…

Why is this?

Because the stock needs to “breathe”

So let’s fix this… it’s not the market out to get you… you are being emotional and not thinking clearly.

Think logically… 

 

1st – What do we know about the big money?

 

Well, they have a lot of money to move… just think about that?

A small trader sees it black and white… buy the breakout and it’s gonna hit 100… you see it’s pretty easy to pick up 1,000 shares of a stock at the market…

Well, that’s not the case for a hedge fund… You see, they need to get 20 million into that stock at a decent price… so how are they going to do it if the stock jumps straight to $100…

They aren’t… so why do you think we see the big swings in the price?

These guys are buying it up then letting it fall to get a better price… over and over… they are pushing it around to get the retail traders in and out as well…

 

2nd – What do we know about the retail traders?

 

Well, they are emotional… they don’t think logically… they overreact… and they all have the same ideas- stops in the same place, etc.

And the idea that the stock should go straight to $100?  That’s a recipe for disaster…

Falsely believing things like this is the reason many traders load up and place stops that are too tight… they just think this thing is ready to blow, so no worries…

Well, the institutions know this… so to get the prices they want, all they have to do is push the price around in big enough swings to stop all the little guys out and take their shares at a steal of a price.

So how do we use this to our advantage?

Easy!

Just take all of that into account when planning your trades… expect the swings and plan your trades accordingly… as in don’t place your stops with all the retail guys… and don’t take too much size to have a reasonable stop in the first place…

One option is to play the swings… take a partial position with a logical stop… not a retail one…

Then instead of being scared or stopped out on pullbacks and swings… add/ layer into the rest of your position with the big money traders…

There is nothing scary about the “market.”

Just think with a clear head… think about the humans in the market, not the market as a human… and trade with a simple and logical thought process.

Become a master trader. Get actionable insights, tools & guidance to achieve your trading goals… without trading all day long!

 

JOIN NOW

Author: Petra Hess