Engulfing pattern: Analysis of classic reversal signal in K-line chart

In recent sharing, we mainly talked about several fundamental analysis methods, and today we will switch to technical analysis to talk about K-lines. K-line morphological analysis is widely welcomed for its intuitiveness and effectiveness. It not only shows price fluctuations, but also reveals changes in market sentiment and potential trend reversals. In this article, EagleTrader will focus on the engulfing patterns in the K-line, including bullish engulf and bearish engulf, and how they are actually applied.

What is the engulfing form

The engulfing pattern is a K-line reversal signal composed of two K-lines, which indicates that the current trend may be about to change. This pattern is divided into two types: bullish engulfing pattern and bearish engulfing pattern.

Bullish Engulfing Pattern

The bullish engulfing pattern usually appears at the bottom of a downward trend, consisting of a negative line and a positive line, where the entity of the second positive line completely covers the entity of the first negative line, including the shadow line. This pattern indicates that the buyer is beginning to control the market, which may indicate an increase in prices.

BearishEngulfing Pattern

The bearish engulfing pattern is the opposite, it appears at the top of the upward trend, consisting of a positive line and a negative line, where the entity of the second negative line completely covers the entity of the first positive line. thisIt indicates that the seller is beginning to have an advantage, which may indicate a price drop.

Features of Engulfing morphology

Trend background: The engulfing pattern must appear in a clear upward or downward trend.

Entity coverage: The entity of the second K-line must completely cover the entity of the first K-line.

The colors are opposite: the colors of the two K-lines must be opposite, that is, a positive line is followed by a negative line, or a negative line is followed by a positive line.

Explanation of Market Psychology

The engulfing pattern reflects the psychological changes of market traders. In a bullish engulfing pattern, buyers begin to dominate the market, indicating that they are willing to buy at a higher price, thereby pushing up the price. Instead, in the bearish engulfing pattern, sellers begin to dominate the market, indicating that they are willing to sell at a lower price, causing prices to fall.

Practical Application

1.Confirm the trend background

Before applying the engulfing pattern, the market trend background needs to be confirmed first. The engulfing pattern usually occurs in a clear upward or downward trend. This means that when identifying the engulfing pattern, traders should ensure that there is a clear trend before the pattern.

2. Combined with trading volume

When a second entity (K-line) of the engulfing form appears, it is usually accompanied by an explosion of trading volume, which can increase the effectiveness of the reversal signal. Therefore, in actual combat, traders should check whether the trading volume increases synchronously with the second K-line of the engulfing pattern.

3.Select entry point

The engulfing pattern can be used as a reference for traders to choose entry points. For example, for bullish engulfing patterns, if the pattern appears, the next few K-lines continue to rise without falling below the lowest point of the pattern, it may be a buy signal.

4. Combining moving average and trend line

In actual combat, using the engulfing pattern in combination with the moving average and the trend line can improve the success rate of the transaction. If the market is in an upward trend and there is a bearish engulfing pattern at the end of the upward trend, and the market falls below the support level of the upward trend line, and the moving average indicator shows a dead cross, it may indicate that the market is about to reversal and downward.

5. Set stop loss

When using the engulf pattern as a trading signal, a reasonable stop loss setting is the key to controlling risk. Generally, the stop loss point can be set outside the shadow of the engulfing pattern to avoid small fluctuations in the market triggering the stop loss.

6. Confirm the reversal signal

To confirm whether the engulfing pattern is a valid reversal signal, traders can wait for the trend of the next trading day after the pattern appears. If the price trend of the next trading day continues to move in the direction indicated by the engulfing pattern, the reversal signal is confirmed.

The engulfing pattern is a relatively common trend pattern in the K-line, which can help traders identify potential changes in market trends. However, no single K-line pattern can provide 100% accuracy, so in actual trading, traders should combine other technical indicators and market analysis to improve the accuracy of predictions. Through in-depth understanding and correct application of the engulfing pattern, EagleTrader also hopes that traders can better grasp market dynamics and improve the quality of trading decisions.