Bullish and Bearish Engulfing

Single candles tell you about one period. From here on you read pairs and triples, where the relationship between the candles carries the message. The engulfing pair is the cleanest example: the second candle's body completely covers the first candle's body, so everyone who traded the previous period is now underwater.

• Definition: a small bearish candle followed by a bullish candle whose body opens at or below the first close and closes at or above the first open.
• Psychology: sellers finished the first period in control, then buyers absorbed all of that supply and more inside a single candle. Every short from the previous period is losing.
• Where it forms: at the end of a pullback in an uptrend, at support, at a prior swing low, or on the first candle after a liquidity sweep below an obvious low.
• What usually happens next: continuation higher when the engulfing candle closes near its high on rising volume; a stall when its body only just covers the first and the close sits mid-range.

• Definition: a small bullish candle followed by a bearish candle whose body fully covers it.
• Psychology: buyers had the period, then sellers reversed the whole move and closed it lower. Late longs are trapped immediately.
• Where it forms: at the top of a rally into resistance, at a prior swing high, or after a false break above a range.
• What usually happens next: a move toward the base of the prior leg. The failure case is a quick reclaim of the engulfing candle's high, which usually means it was a stop run, not a reversal.

• Confirmed bullish: the following candle closes above the engulfing candle's high.
• Confirmed bearish: the following candle closes below the engulfing candle's low.
• Rejected: price closes back inside the engulfed body, or beyond the engulfing candle's opposite extreme — the pattern is void and that extreme is your stop.
• Quality filter: bigger relative body, close near the extreme, and location at a level you marked before the candle formed.