Engulfing Pattern

The Engulfing pattern is a powerful two-candlestick reversal pattern. A bullish engulfing occurs when a large white candle completely engulfs the previous small black candle. A bearish engulfing is the opposite.

Usage

require 'sqa/tai'

open  = [100.0, 101.0, 102.0, 104.0, 103.0]
high  = [101.0, 102.5, 105.0, 105.0, 108.0]
low   = [99.0, 100.5, 101.5, 102.5, 102.0]
close = [100.5, 102.0, 104.5, 103.0, 107.0]

# Detect Engulfing patterns
engulfing = SQA::TAI.cdl_engulfing(open, high, low, close)

if engulfing.last == 100
  puts "Bullish Engulfing - Buy signal!"
elsif engulfing.last == -100
  puts "Bearish Engulfing - Sell signal!"
end

Parameters

Parameter	Type	Required	Description
open	Array	Yes	Array of opening prices
high	Array	Yes	Array of high prices
low	Array	Yes	Array of low prices
close	Array	Yes	Array of closing prices

Returns

Returns an array of integers: - 0: No Engulfing pattern - 100: Bullish Engulfing (buy signal) - -100: Bearish Engulfing (sell signal)

Bullish Engulfing

Characteristics

• Occurs after downtrend
• First candle: Small bearish (black)
• Second candle: Large bullish (white)
• Second candle engulfs first

Visual Pattern

After downtrend:

  |---|      Small bearish

    |-----|  Large bullish (engulfs previous)
    |     |
    |-----|

Bearish Engulfing

Characteristics

• Occurs after uptrend
• First candle: Small bullish (white)
• Second candle: Large bearish (black)
• Second candle engulfs first

Visual Pattern

After uptrend:

  |-----|    Small bullish

    |-----|  Large bearish (engulfs previous)
    |     |
    |-----|

Interpretation

• Strong reversal signal: One of most reliable patterns
• Shows momentum shift
• Large candle shows conviction
• Best at key support/resistance levels

Example: Engulfing in Trend Context

open, high, low, close = load_ohlc_data('AAPL')

engulfing = SQA::TAI.cdl_engulfing(open, high, low, close)
sma_50 = SQA::TAI.sma(close, period: 50)

if engulfing.last == 100
  # Bullish engulfing
  in_downtrend = close[-2] < sma_50[-2]

  if in_downtrend
    puts "Bullish Engulfing in downtrend!"
    puts "Strong reversal signal - Consider LONG"
  else
    puts "Bullish Engulfing but not in downtrend"
    puts "May be continuation - verify context"
  end
elsif engulfing.last == -100
  # Bearish engulfing
  in_uptrend = close[-2] > sma_50[-2]

  if in_uptrend
    puts "Bearish Engulfing in uptrend!"
    puts "Strong reversal signal - Consider SHORT"
  else
    puts "Bearish Engulfing but not in uptrend"
    puts "May be continuation - verify context"
  end
end

Example: Engulfing with Volume Confirmation

open, high, low, close, volume = load_ohlc_volume_data('TSLA')

engulfing = SQA::TAI.cdl_engulfing(open, high, low, close)

if engulfing.last != 0
  pattern_type = engulfing.last > 0 ? "Bullish" : "Bearish"

  # Compare volumes
  vol_first_candle = volume[-2]
  vol_engulfing_candle = volume[-1]
  avg_volume = volume[-20..-1].sum / 20.0

  puts "#{pattern_type} Engulfing Pattern"
  puts "First candle volume: #{vol_first_candle.round(0)}"
  puts "Engulfing candle volume: #{vol_engulfing_candle.round(0)}"
  puts "Average volume: #{avg_volume.round(0)}"

  # Strong pattern = engulfing candle has high volume
  if vol_engulfing_candle > avg_volume * 1.5
    puts "\nSTRONG PATTERN with high volume!"
    puts "High conviction reversal"
  elsif vol_engulfing_candle > vol_first_candle
    puts "\nGOOD PATTERN - volume increased"
  else
    puts "\nWEAK PATTERN - low volume"
    puts "Less reliable - wait for confirmation"
  end
end

Example: Engulfing at Support/Resistance

open, high, low, close = load_ohlc_data('MSFT')

engulfing = SQA::TAI.cdl_engulfing(open, high, low, close)

# Find key levels
resistance = close[-120..-1].max
support = close[-120..-1].min

if engulfing.last == 100  # Bullish
  distance_from_support = ((close.last - support) / support * 100).abs

  if distance_from_support < 3  # Within 3% of support
    puts "Bullish Engulfing AT SUPPORT!"
    puts "Current: #{close.last.round(2)}"
    puts "Support: #{support.round(2)}"
    puts "Buyers defending major support"
    puts "HIGH PROBABILITY reversal setup"
  end
elsif engulfing.last == -100  # Bearish
  distance_from_resistance = ((close.last - resistance) / resistance * 100).abs

  if distance_from_resistance < 3  # Within 3% of resistance
    puts "Bearish Engulfing AT RESISTANCE!"
    puts "Current: #{close.last.round(2)}"
    puts "Resistance: #{resistance.round(2)}"
    puts "Sellers defending major resistance"
    puts "HIGH PROBABILITY reversal setup"
  end
end

Example: Engulfing with RSI

open, high, low, close = load_ohlc_data('NVDA')

engulfing = SQA::TAI.cdl_engulfing(open, high, low, close)
rsi = SQA::TAI.rsi(close, period: 14)

if engulfing.last == 100  # Bullish
  if rsi.last < 30
    puts "Bullish Engulfing + OVERSOLD RSI!"
    puts "RSI: #{rsi.last.round(2)}"
    puts "Multiple bullish signals - Strong BUY"
  elsif rsi.last < 40
    puts "Bullish Engulfing + Low RSI"
    puts "RSI: #{rsi.last.round(2)}"
    puts "Good reversal setup"
  end
elsif engulfing.last == -100  # Bearish
  if rsi.last > 70
    puts "Bearish Engulfing + OVERBOUGHT RSI!"
    puts "RSI: #{rsi.last.round(2)}"
    puts "Multiple bearish signals - Strong SELL"
  elsif rsi.last > 60
    puts "Bearish Engulfing + High RSI"
    puts "RSI: #{rsi.last.round(2)}"
    puts "Good reversal setup"
  end
end

Trading the Engulfing Pattern

Entry Strategies

Aggressive Entry

# Enter immediately at engulfing candle close
if engulfing.last != 0
  entry = close.last
  direction = engulfing.last > 0 ? "LONG" : "SHORT"
  puts "Enter #{direction} at #{entry.round(2)}"
end

Conservative Entry

# Wait for next candle confirmation
if engulfing[-2] != 0
  if engulfing[-2] == 100 && close[-1] > close[-2]
    puts "Bullish engulfing confirmed - Enter LONG"
  elsif engulfing[-2] == -100 && close[-1] < close[-2]
    puts "Bearish engulfing confirmed - Enter SHORT"
  end
end

Stop Loss Placement

if engulfing.last == 100  # Bullish
  # Stop below engulfing pattern low
  stop = [low[-2], low[-1]].min
  stop_with_buffer = stop * 0.995  # 0.5% buffer
  puts "Stop loss: #{stop_with_buffer.round(2)}"

elsif engulfing.last == -100  # Bearish
  # Stop above engulfing pattern high
  stop = [high[-2], high[-1]].max
  stop_with_buffer = stop * 1.005  # 0.5% buffer
  puts "Stop loss: #{stop_with_buffer.round(2)}"
end

Profit Targets

if engulfing.last == 100  # Bullish
  entry = close.last
  stop = [low[-2], low[-1]].min
  risk = entry - stop

  target_1 = entry + (risk * 1.5)  # 1.5:1
  target_2 = entry + (risk * 2.5)  # 2.5:1
  target_3 = entry + (risk * 4)    # 4:1

  puts "Targets:"
  puts "T1 (1.5:1): #{target_1.round(2)}"
  puts "T2 (2.5:1): #{target_2.round(2)}"
  puts "T3 (4:1): #{target_3.round(2)}"
end

Example: Complete Trading System

open, high, low, close, volume = load_ohlc_volume_data('GOOGL')

engulfing = SQA::TAI.cdl_engulfing(open, high, low, close)
rsi = SQA::TAI.rsi(close, period: 14)
sma_50 = SQA::TAI.sma(close, period: 50)
sma_200 = SQA::TAI.sma(close, period: 200)

if engulfing.last != 0
  is_bullish = engulfing.last > 0
  pattern_name = is_bullish ? "Bullish Engulfing" : "Bearish Engulfing"

  # Context analysis
  trend = if is_bullish
    close[-2] < sma_50[-2] ? "Downtrend" : "Not downtrend"
  else
    close[-2] > sma_50[-2] ? "Uptrend" : "Not uptrend"
  end

  # RSI check
  rsi_val = rsi.last
  rsi_favorable = is_bullish ? rsi_val < 40 : rsi_val > 60

  # Volume check
  avg_vol = volume[-20..-1].sum / 20.0
  high_volume = volume.last > avg_vol * 1.3

  # Support/Resistance check
  support = close[-60..-1].min
  resistance = close[-60..-1].max
  at_key_level = if is_bullish
    (close.last - support).abs < support * 0.03
  else
    (close.last - resistance).abs < resistance * 0.03
  end

  # Size of engulfing candle
  first_body = (close[-2] - open[-2]).abs
  engulf_body = (close[-1] - open[-1]).abs
  strong_engulf = engulf_body > first_body * 2

  # Calculate score
  score = 0
  score += 1 if trend.include?("trend")
  score += 1 if rsi_favorable
  score += 1 if high_volume
  score += 1 if at_key_level
  score += 1 if strong_engulf

  puts "#{pattern_name} Pattern Analysis"
  puts "=" * 40
  puts "Trend Context: #{trend}"
  puts "RSI: #{rsi_val.round(2)} (favorable: #{rsi_favorable})"
  puts "Volume: #{high_volume ? 'High' : 'Normal'}"
  puts "At Key Level: #{at_key_level}"
  puts "Strong Engulfing: #{strong_engulf}"
  puts "\nSetup Score: #{score}/5"

  if score >= 4
    entry = close.last
    stop = is_bullish ? [low[-2], low[-1]].min : [high[-2], high[-1]].max
    stop = is_bullish ? stop * 0.995 : stop * 1.005
    risk = (entry - stop).abs
    target = is_bullish ? entry + risk * 3 : entry - risk * 3

    puts "\n*** HIGH PROBABILITY SETUP ***"
    puts "Direction: #{is_bullish ? 'LONG' : 'SHORT'}"
    puts "Entry: #{entry.round(2)}"
    puts "Stop: #{stop.round(2)}"
    puts "Target: #{target.round(2)}"
    puts "Risk: $#{risk.round(2)}"
    puts "Reward: $#{((target - entry).abs).round(2)}"
    puts "R:R = 1:3"
  elsif score >= 3
    puts "\nDECENT SETUP - Consider position sizing down"
  else
    puts "\nLOW PROBABILITY - Skip this trade"
  end
end

Pattern Strength Factors

Factor	Weak	Medium	Strong
Engulfing Size	1.2× first	1.5× first	2×+ first
Volume	< Average	Average	1.5×+ avg
Trend Context	Weak trend	Clear trend	Strong trend
RSI	Neutral	Approaching	Extreme
Location	Random	Near level	At key level

Note: Array elements should be ordered from oldest to newest (chronological order)

Advantages

• Clear visual pattern
• Strong reversal signal
• Objective entry/stop rules
• Works on all timeframes
• High reliability when confirmed

Limitations

• Can occur mid-trend (false signals)
• Needs trend context
• Better with confirmation
• Requires volume analysis
• Not common (wait for quality setups)

Common Mistakes

1. Trading without trend context
2. Ignoring volume
3. Not using key levels
4. No confirmation wait
5. Poor stop placement

Best Practices

1. ✅ Wait for right trend context
2. ✅ Confirm with volume
3. ✅ Look for RSI extremes
4. ✅ Trade at support/resistance
5. ✅ Use proper risk management

See Also

• Hammer Pattern - Single candle reversal
• Doji Pattern - Indecision pattern
• Pattern Recognition Overview
• Back to Indicators
• Basic Usage