Engulfing Candle
Definition
An engulfing candle is a candlestick whose body completely covers — or 'engulfs' — the prior candle's body, signaling a potential shift in control between buyers and sellers.
Example
“After a long downtrend, a massive green candle swallowed the prior three red candles at a major support level. That bullish engulfing pattern, with volume three times the average, was the reversal signal I needed.”
Detailed Explanation
A bullish engulfing pattern forms when a red candle is followed by a larger green candle that opens below the prior candle's low and closes above its high. This shows that sellers were initially in control (the prior red candle), but buyers stepped in aggressively enough to reverse the entire prior period's move and close significantly higher. The bigger the engulfing candle relative to the prior candle, the stronger the signal. A bullish engulfing that covers two or three prior candles is significantly more meaningful than one that barely covers the previous candle.
Location matters enormously. An engulfing candle in the middle of a choppy range is noise. An engulfing candle at a major support level after an extended downtrend, at VWAP, at a key Fibonacci level, or at a prior area of high volume is a meaningful signal. The context tells you whether the pattern represents a genuine inflection point or just random price movement. This is why technical analysts always say "patterns are signals — levels give them meaning."
For practical trading, use engulfing candles as confirmation rather than standalone entry triggers. If you're watching a stock that's been pulling back toward a planned entry level, a bullish engulfing candle at that level confirms that buyers are stepping in where you expected them to. Enter on the break of the engulfing candle's high, stop below its low. Without the confluence of level + pattern + volume, an engulfing candle in isolation has limited predictive value.