Bullish engulfing at a level: a candle pattern with context

A bullish engulfing pattern is two candles: a red one, then a green one big enough to cover the red candle's body. It shows sellers in control for one candle and buyers taking it all back in the next. On its own the pattern is common and unreliable. This setup only trades it where it makes sense: right at a price level that has mattered before.

How it works

A candle's body is the part between the open and the close. A red candle closed lower than it opened. A green candle closed higher. In a bullish engulfing pattern, the green candle opens at or below where the red one closed and finishes above where the red one opened. Its body wraps around the red body completely.

Engulfing candles appear all the time, in the middle of nowhere, during noise. What gives one meaning is where it happens. A level is a price where buyers or sellers have shown up before. This setup accepts four kinds:

• Swing lows. A swing low is a candle whose low is below the 3 candles before and the 3 after it. The last 3 swing lows count.
• The previous day's low, using the UTC calendar day.
• The POC (point of control): the price where the most volume traded over the last 96 candles.
• The VAL (value area low): the bottom of the band of prices that held 70% of that volume.

Distance to the level is measured in ATR (average true range), the typical size of a recent candle. Using ATR means “close to the level” adjusts to how volatile the coin is. Within 0.3 ATR is close: about a third of a normal candle.

Put together, the story is: price falls into a level, sellers push one more red candle, and the next candle reverses all of it. That is a sign the level is being defended.

The rules, precisely

Here is one precise, testable version of this strategy. Traders vary these numbers. It is written for a long. The short is the mirror image: a bearish engulfing candle at a level above.

1. Red then green: the candle before is red and this candle is green.
2. Engulfing: this candle opens at or below the previous close and closes above the previous open.
3. At a level: the low of the two candles is within 0.3 ATR of a key level: the VAL, the POC, one of the last 3 swing lows, or the previous day's low.
4. Entry: at the close of the green candle.
5. Stop: below the low of the two candles, minus 0.2 ATR.
6. Target 1: the nearest level above the price that is at least 0.5 ATR above it.

What to check

1. Is the level real? A swing low that price bounced from cleanly, or a previous day's low many traders can see, is worth more than a faint level found by searching. Levels where two kinds overlap, such as a swing low near the VAL, are stronger still.
2. What is the bigger trend? Look one timeframe up. If it is trending down (close below the 20 EMA, the 20 EMA below the 50 EMA), support levels fail more often. An engulfing candle against that trend is a lower-odds trade.
3. How big is the green candle? A very large engulfing candle puts the entry far above the stop. Check that the stop is between 0.25 and 4 ATR from the entry and that target 1 is still at least 1.5 R away.
4. What is overhead? The target is the next level up, but check what sits between. A cluster of levels just above the entry can stall the bounce before it pays.
5. Did volume confirm? A green candle on clearly higher volume than the red one shows real buying. A green candle on thin volume, often during quiet hours, is weaker.
6. Is there news? Levels describe past trading. If something has changed what the coin is worth, old levels can stop mattering at once.
7. Do fees fit the timeframe? On 15-minute candles the two-candle low can be very close to the entry. If round-trip fees cost more than 0.3 R, skip it.

Stops, targets and the time limit work the same way for every setup in this series. See managing a setup: stops, targets and the time limit.