- : January 23, 2021
- : Prashant Shah
Engulfing Price Pattern
Below is a picture of Bullish and Bearish Engulfing Candlestick patterns.
Abullish candle that engulfs the body of previous bearish candle is known as a Bullish Engulfing candlestick pattern and a bearish candle that engulfs the body of previous bullish candle is known as a Bearish Engulfing pattern.
But why only two sessions? How if I want to look for this pattern in price irrespective of number of sessions in which it occurs?
In Bullish Engulfing pattern,price pattern was bearish in first session,but bulls were enormously powerful in the next session.Even though price opened lower,it managed to close above the body of previous candle. Vice versa for bearishpattern.
See below image.
This is a 2-candle pattern. We can scan for it and find the stocks qualifying for this pattern over two sessions.
You can know more about Engulfing and other candlestick patterns here on INSIGHT
Bearish swing is engulfed by Bullish swing move. There can be more than one session in bearish swing move but it should be a strong bearish trend without a meaningful price correction in between. The bullish swing move that engulfs previous bearish swing should be a strong impulsive price action without a significant correction inbetween.
Does this mean 100% retracement of previous swing?
This way, we can look for stocks where bulls are showing the strength and they have completely retraced the previous bearish price swing move.
How can we make this objective?
We can do that using P&F. See below image.
In above image,Bull is h column of X (Bullish swing) has engulfed previous column of O (Bearish swing). There is not even a 3-box reversal in between so correction is not meaningful.This will ensure that price is in same swing and momentum.
Since we are using P&F to define this, we have opportunity to add more useful rules to this pattern.
This pattern will not be meaning fulif the price swings in the pattern are small. Length of columns in the pattern should not be small.
Another thing-this pattern should not be apart of higher degree volatile phase,even the 100% retracement will not be that meaningful in that case.To addresses this, there are two important rules that we canadd.
There should be a bearish price breakout in bearish swing. In simple words, there should be a double- bottom sell pattern in the bearish column.
To ensure that the length of column should not be small, I found the rules of P&F Pole patterns useful. There should beat least 5-boxes after the double-bottom sell pattern.
The next column of X should completely retrace the previous bearish column of O and it should be a breakout column. To summarise both–Next column of X should be a double-top buy pattern.
Final rules are as follows:
I call it Bullish 100%-Pole pattern.
Below are the rules for Bearish 100%-Pole pattern.
1–Double top buy
2–Followed by more than 5 boxes in the same column of X 3–Double-bottom sell in next column of O
- – Double bottomsell
- –Followed by more than 5 box esin the same column of O 3–Double - top buy in next column of X
I have introduced this pattern in mybook Trading the markets the Point & Figure way. There is a ready scanner available for these patterns in TradePoint.
Though they are extension to the Pole pattern, there is a logic and athought-process behind the structure which needs to be understood.We are trying to decipher a price pattern of bulls overcoming bearish price action and vice versausing the important property of P&F charts–box.
How to trade this pattern?
If you find this pattern on daily time frame,look for a breakout in those stocks on lower time frame in next session.
For trading on same time frame, the double-bottom sell or double-top buy stop-loss will not be affordable because length of the columns are high. What is the solution for that? Follow-through is a Master-key.
Double-topbuyfollowedbybullish100%poleandDouble-bottomsellfollowedbybearish100%poleare trade-able pricepattern.
Below is one of the stocks that appeared in 100% pole follow through scanner.
Notice the number of sessions in bearish price swing.
You can limit your stop-loss to 8-box to keep initial risk in control. You can define that in scanner itself.
Can you build 100%-pole follow-through and probable follow-through break out patterns? Try to do that and let us know in case of difficulty. We can discuss that in Forum(https://forum.definedge.com/).
100%-pole is a useful price pattern. If you come across this tructure while following your existing method, you have an important price confirmation on the chart.