The price action trading strategy is very much popular in today trading world. There are many different types of trading styles and technique in the forex market but when it comes to reliability and ease of use price action trading tends to be the best trading strategy in the forex market. As a professional price action trader, you will never have to worry about forex margin since all your trade will be executed with proper risk reward ratio. The expert uses different types of candlestick formation to trade they key support and resistance level in the market. Among many different types of candlestick pattern, the engulfing pattern is very much popular to the expert price action traders. This pattern helps the traders to identify the bullish and bearish reversal of a certain currency pair. But it is extremely important that you use the higher time frame to trade this pattern since it’s a technique which allows the traders to pick the reversal in the market. However, this can also be used is retrace trading but still higher time frame is preferred by the traders.
What is an engulfing pattern?
The engulfing pattern is comprised of two candlesticks in the chart. There are two types of engulfing pattern in the forex market. These are
The bullish engulfing pattern
The bearish engulfing pattern
Let’s look at the formation of the engulfing pattern
Figure: The bullish and bearish engulfing pattern in price action trading strategy
In the above figure, you can clearly see the example of bullish engulfing and bearish engulfing pattern used in the price action trading strategy. In the case of bullish engulfing pattern, the first candlestick is red which is formed near a key support level in the market. The next candle will be the green candle or a bullish candle and that candle mush engulf the previous red candle to form the bullish engulfing pattern. The open of the bullish candle should remain below the close of the red candle and the close of the green candle must be above the open of the previous red candle to form the right pattern in the pattern.
In the case of the bearish engulfing pattern, the first candle is green or bullish candle formed at the key resistance level in the market. The next candle will be a black candle which will engulf the previous green candle in the market. By using this pattern you can trade high-quality trade in the market without worrying about your forex margin.
Let’s see an example of bearish engulf pattern trading at the key resistance level
Figure: Trading the bearish engulfing pattern in the AUDUSD daily chart
In the above figure, the professional traders draw the key resistance level in the market with the help of the horizontal line. The yellow shared region is the key resistance level of the market. Once the key resistance level in the market is drawn professional price action traders wait for the bullish retracement in the price near the resistance level. In the above figure, the bearish engulf pattern is formed right at the key resistance level in the market and the expert traders executed their short entry at the point.
Setting the take profit and stop loss level: Professional traders usually use the price action confirmation candlestick pattern to set their potential stop loss in the market. In the above figure, the expert has set their stop loss just above the bearish engulfing pattern. By using the tight stop loss in the market you will always have enough forex margin to carry your trade for the long term. The potential take profit level is set by using the key support level in the market. Most of the professional trader’s book 50 percent of their open position once the market hits its initial take profit level and trails their potential stop loss to the break even position. By using this trailing stop loss feature they maximize their potential profit in the market.
Bullish engulfing pattern trading: Trading the bullish engulfing pattern in the forex market is pretty much similar to the bearish engulfing pattern. Professional price action traders look for bullish engulfing pattern near the key support level of the market. Once the pattern is formed at the key support zone the expert executes their long orders in the market.
They usually set their stop loss just below the bullish engulfing price action signal. They set their potential take profit level to the nearest key resistance level in the market. Just like bearish engulfing pattern trading, they also use trailing stop loss feature in bullish engulfing pattern trading in order to maximize the potential profit level in the market.
Summary: Trading the engulfing pattern extremely profitable and reliable in the forex market. Most of the price action traders consider it as a golden trading opportunity in the market. But before you trade the engulfing pattern in the market make sure that you always use higher time frame in the market. If you trade the lower time frame then you will have lots of false signal in the market professional trader consider the 4 hour and daily time frame as an ideal trading time format for this pattern. Though this price action signal is extremely reliable and profitable in the forex market but make sure that you execute your trade by maintaining proper risk reward ratio in the market. If you don’t follow proper risk reward ratio then you will never become a profitable forex trader. If you see the professional price action trader then you will notice that all of them execute their trade with proper risk management factor.