In this lesson, we will once again touch on such a term as Absorption model on Forex. What are their types, why they are formed, meaning and practical application.
To begin with, let’s take a look at who is absorbing whom. In this case, we are talking about the absorption of a large Japanese candle by a smaller one. The body of a large candlestick completely covers the previous smaller candlestick. Size ratio about 1 to an hour or more, that is, a large candle should be about 2 or more times larger than the previous small one. Look at the screenshots:
Types of models
There are two types – bullish and bearish engulfing. Be sure to read more about them at the links provided. And in this lesson, we will look at general points so that you understand the essence. Bullish – a buy signal, bearish – a sell signal.
An important point! The second engulfing candle should close! For example, if you are trading on the hourly timeframe, then you need to wait until the hourly engulfing candlestick closes and only then place pending buy or sell orders. But more on that below.
Market entry rules
As you already understood, pending orders are used to open a position when trading by engulfing patterns, as well as by many other candlestick patterns. Let’s take a Bullish Engulfing pattern as an example.
She tells us to start shopping. Place a pending buy order Buy Stop just above the price high of the engulfing large white candle. It is desirable that the candlestick does not have a large upper shadow, then the pattern is considered more successful. Let’s see an example:
The same is with the bearish engulfing pattern, only it tells us about selling. Therefore, the order is placed Sell Stop and already below the price low of the engulfing black candlestick. Example:
Stop loss and take profit are set as standard and, in principle, there are several methods for this. You can use strong support-resistance levels to set Take Profit, this is the most common approach and is already shown in the screenshots above. To set the stop loss, we use the local extremum formed by the model itself, see Stop Loss # 1:
Or, if the engulfing candle is very long and because of this the SL will be too large, you can resort to another method of setting. For example, in the area of the middle of a candlestick or following the rules of money management, so that the stop is 2 or more times less than the take profit.
Indicators Absorption patterns
You can download and install an indicator for MT4, which will simplify your work. It is as simple as 5 kopecks and will show you the model with arrows. Green up arrow – buy, red down – sell. The indicator has no settings, just set it on the chart and that’s it.
At the same time, not all models will be valid – do not forget about the rule 1 to 2when the engulfing candle should be about 2 or more times the absorbed one. The indicator will not always give you the correct patterns and you will need to evaluate them yourself for compliance with this rule.
To download the indicator, you only need to join the thousands of users registered on our website. You will even get a personal account with the Online Journal of Transactions!
The engulfing pattern occurs quite often on the chart and serves as a reliable trading strategy with fairly simple conditions for entering and exiting the market. And although this technique is initially indicator-free, no one forbids supplementing it with indicators to your liking: MACD, RSI, ADX, Stochastic and any others. On our site you will find many indicator reviews that may suit you, just use the search at the top of the post.