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Trading The Bullish And Bearish Engulfing And Doji Candlestick Patterns On Dominion Markets

Japanese candlestick charts are the most popular for technical analysis because they give an excellent visual representation of price movement. Moreover, the candlesticks form patterns that are widely used for trading.

Here, we will examine the bullish and bearish engulfing candlestick patterns. We will also look at the doji and how you can trade these candlestick patterns on Dominion Markets.

BULLISH ENGULFING CANDLESTICK PATTERN

The bullish engulfing candlestick is a reversal pattern comprising two candlesticks, a small red bearish one and a big green bullish one. The bullish candlestick completely overlaps the bearish candlestick, and the pattern comes after a downtrend.

When the price is declining, it shows that bears are in the lead. However, when this trend reaches a point, and there is a shift in sentiment, bulls suddenly become stronger. As a result, the price makes a large green candle that engulfs one or more previous red candles.

This is a sign that the trend might reverse. The bigger the trend before the bullish engulfing candlestick, the higher the chances of a reversal.

This candlestick pattern signals a looming reversal on its own. However, experienced traders know that such patterns occur frequently in the market. Therefore, to filter out false signals, use the bullish engulfing candlestick pattern with other analysis tools, like trendlines or support and resistance levels, for better results.

IDENTIFYING THE BULLISH ENGULFING CANDLESTICK PATTERN

Bullish engulfing pattern

Bullish engulfing pattern

To identify the pattern,

  • Look for a downtrend in the market.
  • Look for weak, bearish momentum. After finding a good downtrend, wait for it to show signs of exhaustion. This can be seen in the size of candles, which get smaller or in a sideways move.
  • Look for a sudden surge in bullish momentum. After bears weaken, wait for a big bullish candle that overlaps the previous small bearish candle. This indicates that sentiment has shifted to bullish, which could lead to a reversal. The body of the second candle should overlap the previous candle.

TRADING THE BULLISH ENGULFING CANDLESTICK PATTERN

Trading the bullish engulfing pattern

Trading the bullish engulfing pattern

After identifying the pattern, you can choose to trade it aggressively or cautiously. Aggressive traders will enter a buy position on the first candlestick after the bullish engulfing pattern.

Meanwhile, cautious traders will wait for confirmation. This means waiting for a bullish candle to close after the pattern before entering on the next one. You can place your stop loss below the previous low with appropriate take-profit targets in both cases. In the chart above, we took a cautious trade.

BEARISH ENGULFING CANDLESTICK PATTERN

The bearish engulfing candlestick pattern is the opposite of the bullish engulfing candlestick pattern. It is a reversal pattern that comes after a bullish trend. The pattern comprises two candlesticks: a small green bullish candle and a big bearish candle.

The small bullish candle shows weak momentum during a bullish trend, while the big bearish candle shows a surge in bearish momentum that could lead to a reversal.

The bigger the previous trend, the higher the chance that the bearish engulfing candlestick pattern will lead to a reversal. The pattern can be used alone; however, traders often combine it with other technical tools to improve results.

IDENTIFYING THE BEARISH ENGULFING CANDLESTICK PATTERN

Bearish engulfing pattern

Bearish engulfing pattern

To identify the pattern,

  • Look for a bullish trend. Since it is a reversal pattern, you should look for a long-running trend.
  • Wait for bulls to show weakness with smaller candles. As a trend peaks, momentum slowly fades, and the price starts making smaller candles. This is a sign of exhaustion and precedes a reversal.
  • Look for a sudden surge in bearish momentum. After identifying weakness in the uptrend, wait for bears to make a strong candle whose body completely overlaps the previous bullish candle.

TRADING THE BEARISH ENGULFING CANDLESTICK PATTERN

Trading the bearish engulfing pattern

Trading the bearish engulfing pattern

After identifying the bearish engulfing candlestick pattern, you can use an aggressive or cautious approach to trade the reversal. The aggressive trader will enter a sell position on the next candle after the pattern.

On the other hand, a careful trader will wait for a confirmation bearish candle before entering on the next candle. Place your stop loss above the previous high with appropriate targets.

DOJI CANDLESTICK PATTERN

The doji is a single candlestick pattern where the open and close are near or equal. Therefore, the candlestick has a tiny body or none at all. Moreover, the doji has wicks or shadows that can vary in length, showing the trading range.

The doji candlestick pattern indicates indecision and a battle for control between bears and bulls. Therefore, indecision after a strong trend could signal a looming reversal. The pattern can come in different forms depending on the size of the wicks and the position of the middle line/body.

Furthermore, the pattern can appear in a bullish or bearish trend. It signals a possible reversal to the downside if it occurs after a bullish trend. On the other hand, if it appears in a bearish trend, it indicates a looming reversal to the upside.

IDENTIFYING THE DOJI CANDLESTICK PATTERN

Doji candlestick pattern

Doji candlestick pattern

To identify the doji pattern,

  • Look for a strong, bullish, or bearish trend.
  • Look for a candle with a very small or no body at all. This means the candle's open and close should be equal or near.
  • Look for shadows/wicks showing that both bears and bulls have shown strength in the trading period.

TRADING THE DOJI CANDLESTICK PATTERN

Trading the doji candlestick pattern

Trading the doji candlestick pattern

After identifying it, the best way to trade the doji pattern is to wait for a confirmation candle. If the doji comes after a bullish trend, wait for a big red candle after the doji to confirm a reversal. Place your sell entry on the next candle with stops above the previous high and appropriate targets.

On the other hand, if the doji comes after a bearish trend, wait for a big green candle to confirm a bullish reversal. Place your buy entry after this candle with stops below the previous low and appropriate targets.

Trading candlestick patterns can be a great addition to your strategy. Join Dominion Markets today and start using the most popular candlestick patterns today.