Japanese Candlesticks Part 3
[00:11] – Welcome to another video in our forex trading training series. This is Video #7 – Reading Japanese Candlesticks Part 3. In our previous two videos, I have taught Japanese Candlesticks; I gave an introduction to Japanese Candlesticks. And in the previous video, I taught about Pin Bars and gave some examples of Pin Bar candles and the signals that can give in the forex market. In this video, I am going to teach about Engulfing candles. I will give some illustration and then we’ll look at some real price charts and I will show you the power of Engulfing Candles.
[00:57] – Engulfing Candles are candles that overshadow the candle previous, or in other words, the candle previous fits inside the current candle which makes it Engulfing. We have two examples of Bullish Engulfing Candles. It’s a previous candle; it’s a current candle. The sheer size of this current Bullish candle overshadows or engulfs the candles previous, and the body of this previous candle can fit inside the body of this Bullish candle.
For example: same principal, the size of this bullish Engulfing engulfs the candle previous, and this bearish body can easily fit within this bullish body. A bullish Engulfing Candle is a candle that closes higher than the open whereas the bearish Engulfing Candle is a candle that closes lower than the open. It obviously has an Engulfing characteristics.
So let’s look at these two examples of Bearish Engulfing. Here is a bullish candle, the candle previous; our next candle engulfs or overshadows the candle previous. And here is another bearish engulfing example; this body easily fits within the bearish body. Hence we have an Engulfing Candle.
Engulfing Candles work for few reasons. Just like pin bars, they are self-fulfilling. Traders use Engulfing Candles as signals to buy/sell obviously bullish Engulfing Candles, to buy bearish Engulfing Candles, to sell. Another reason Engulfing Candles work is they demonstrate the pressure or the power in the market. A bullish Engulfing is demonstrating strong buying power whereas the bearish engulfing is demonstrating strong selling power.
And then the third reason why Engulfing Candles work is that on higher time frames, they can show as pin bars. If we take this example of a bearish engulfing. If this was the 15 minute chart, each these candles would represent 15 minutes time. If we were to see now a 30 minute chart, price would have opened here and closed here, and the mood have a long upper wick. Hence, creating a pin bar.
That’s three reason why Engulfing Candles work.
[04:00] – Let me give you an illustration of what can happen in financial markets with price. Price can come on the upside. We have a bearish Engulfing Candle and then price reverses and goes on the downside. And obviously we could have the price coming on the downside. We could have a bullish Engulfing Candle up here and price could then go on the upside.
In our previous video, when we looked at the Pin Bars I gave some examples of pin bars on the daily chart of the Pound against the Dollar. In this video, let’s look at another daily chart. This time it’s US Dollar against the Canadian Dollar.
[04:42] – This is the US Dollar against the Canadian Dollar. Price has gone up; we have a pin bar; this signal was discussed in the previous video. Price then comes down and we have a first Engulfing Candle and it’s a bearish Engulfing Candle. So here is our candle previous that opened here and closed here or Engulfing Candle opens here and closes here. So the size of this candle engulfs or overshadows the candle previous. Price then continues on the downside. We have another bearish Engulfing Candle. It engulfs the candle previous; price continues on the downside. We have another Engulfing Candle, a bearish Engulfing Candle. Price continues on the downside. And then we have the fourth Engulfing Candle; another bearish is the previous body and price continues on the downside. We have our first bullish Engulfing Candle. It is extremely large and engulfs a number of candles previous learned. Just the one candle previous closes here, open here and price goes on the upside.
Our next significant engulfing is here. Price falls on the downside. We then have a bullish engulfing, price then goes on the upside. When I showed you the pin bars on the Pound against the Dollar, the day had just closed with a pin bar on the dollar against the Canadian dollar, price has just closed with a bearish engulfing.
Here is our candle previous. We have this strong bearish candle that engulfs or overshadows the candle previous. So in tomorrow’s trading, we may see price further on the downside. And we could trade this Engulfing Candle by going short.
[07:14] – In summary, Engulfing Candles overshadow the previous candle and they can act as signals of price reversals and continued price momentum. Our next video is Reading Japanese Candlesticks Part 4. Thank you for watching.