What is the engulfing rule?

Four conditions, shown in the drawing at the top of this page. If bodies and wicks are new to you, start with how to read candlesticks.

Hypothetical bullish engulfing: after a pullback, a red 15-minute candle opens at $25.40 and closes at $25.15. The next candle opens at $25.10 and closes at $25.95. Its $0.85 body covers the whole $0.25 red body. A green candle that opened at $25.20 and closed at $25.95 would not qualify: the red body reaches down to $25.15, below that open.

  • Prior move: a decline before a bullish engulfing, a rise before a bearish one.
  • Colors: opposite. The first candle goes with the move, the second against it.
  • Bodies: the second body covers the first from top to bottom. The wicks do not need to be covered.
  • Equal ends: strict textbooks want the second body to go past both ends of the first. Intraday, the second candle usually opens right at the previous close, so many traders accept an equal open if the close goes well past the first body.

Engulfing vs harami: what is the difference?

The harami is the engulfing pattern reversed. In an engulfing, a small body is followed by a big one that covers it. In a harami (Japanese for “pregnant”), a big body is followed by a small one that sits inside it. The engulfing says the other side took over; the harami only says the move stalled.

The third panel below is the case that fools people: the second candle’s wicks cover the first candle, but its body does not cover the first body. That is not an engulfing pattern. A candle whose whole range covers the previous range is what price action traders call an outside bar, a looser idea covered in price action trading.

Turn your phone sideways to read the drawing. Tap to close.

Three hand-drawn panels after the same short decline, with dashed lines at the top and bottom of the first pattern candle’s body. Left: a bullish engulfing, a small red body covered by a big green body. Middle: a harami, a big red body with a small green body inside it. Right: not an engulfing, a green candle whose wicks cover the red candle but whose body does not cover the red body.

How to trade a bullish engulfing pattern

The plan for the bearish version is the same, upside down.

Hypothetical: an uptrend pulls back to $25.00, the prior day’s high, now acting as support. The engulfing candle from the example above closes at $25.95 with a high of $26.00, and the low of the two candles is $24.98. A buy stop at $26.05 fills when the next candle trades higher. Stop at $24.90: $1.15 of risk. The swing high at $28.40 is $2.35 away, about a 1:2 risk-reward ratio.

UpTickFlow works on the same principle, waiting for a closed candle at a level and drawing the entry, stop and target before the trade. It does not detect engulfing patterns.

  1. Mark the level before the pattern forms: support, the prior day’s high or low, a zone from your support and resistance work.
  2. Wait for the engulfing candle to close. A green candle that covers the red body halfway through the period can still close back inside it.
  3. Confirm: a following candle closes above the engulfing candle’s close; stricter traders want a close above its high, or use a buy stop just above that high.
  4. Stop just under the lower of the two candles’ lows, where buyers have clearly lost.
  5. Target the next level, and skip the trade if it is not clearly farther away than the stop.

What makes an engulfing pattern stronger? A checklist

Two engulfing patterns can look alike and deserve very different treatment. The report card below scores two hypothetical bullish engulfing patterns on four checks.

The pattern at support passes all four. The one in the middle of a range passes the body and room checks but fails the other two, so it is a skip. A checklist does not make a pattern work; it only filters out the weakest ones.

  • After a move into a level: the pattern ends a decline at support, or a rally at resistance, instead of a wiggle mid-range.
  • Second body much bigger: a large body swallowing a small one shows a decisive shift. A green candle covering a tiny red one by a few cents is routine, especially on 5-minute charts.
  • Volume above average: the engulfing candle trades more than recent candles at that time of day, which is what relative volume measures. A takeover on thin volume is easier to reverse.
  • Room to the next level: an engulfing that closes just under resistance has no space left for a target.

Turn your phone sideways to read the drawing. Tap to close.

A hand-drawn report card for two bullish engulfing patterns. The first column shows a small sketch of the pattern at a green support line after a decline; the second shows one in the middle of a range between two lines. Rows: after a move into a level, 2nd body much bigger, volume above average, room to the next level. The first column has four green checks and the verdict worth a look; the second has red crosses on the level and volume rows and the verdict skip.

When does an engulfing pattern fail?

A hypothetical failure: same setup, another day. The buy stop fills at $26.05, then sellers return and price breaks $24.90. The stop fills there, or lower if price gaps: a planned loss of about $1.15 a share. For the three-candle cousin of the bullish engulfing, see the morning star.

  • Mid-range or against a steep trend: a bullish engulfing inside a sharp downtrend often marks a pause before the next leg down.
  • Tiny first candle: covering a doji-sized body is easy and says little.
  • Huge engulfing candle: it leaves the stop far below. If the risk is bigger than the room to the target, skip it.
  • No follow-through: price fails to close above the engulfing high and slips back into the first body. A close below the low of the two candles ends the idea.