Dual candlestick patterns

Dual Candlestick Patterns Engulfing and Tweezers

Dual candlestick patterns

To identify dual Japanese candlestick patterns, you need to look for specific formations that consist of two candlesticks in total.

Engulfing Pattern

The Engulfing pattern is formed by two candles, where the body of the first candle is “engulfed” by the body of the second candle. Engulfing patterns provide an approach for traders to enter the market in anticipation of a possible trend reversal. An engulfing pattern is a reversal candlestick pattern that can be bearish or bullish depending upon whether it appears at the end of an uptrend or downtrend. The pattern formation consists of two candles. The first candle is characterized by a small body, followed by a taller candle whose body completely engulfs the previous candle’s body.

There are two types of engulfing candlestick patterns:

  1. Bullish Engulfing pattern
  2. Bearish Engulfing pattern

The Bullish Engulfing pattern provides the strongest signal when appearing at the bottom of a downtrend and indicates a surge in buying pressure. The bullish engulfing pattern often triggers a reversal of an existing trend as more buyers enter the market and drive prices up further. The pattern involves two candles with the second candle completely engulfing the body of the first candle.

The Bearish Engulfing pattern is simply the opposite of the Bearish Engulfing pattern. It provides the strongest signal when appearing at the top of an uptrend and indicates a surge in selling pressure.The Bearish Engulfing pattern often triggers a reversal of an existing trend as more sellers enter the market and drive prices down further.The pattern involves two candles with the second candle completely engulfing the body of the first candle.

Traders can look to trade engulfing patterns by waiting for confirmation of the move. This is done by observing price action after the pattern has formed and seeing if the price continues in the expected direction.

Bullish Engulfing Candle Reversals

Investors should look not only to the two candlesticks which form the bullish engulfing pattern but also to the preceding candlesticks. This larger context will give a clearer picture of whether the bullish engulfing pattern marks a true trend reversal.

Bullish engulfing patterns are more likely to signal reversals when they are preceded by four or more black candlesticks. The more preceding black candlesticks the bullish engulfing candle engulfs, the greater the chance a trend reversal is forming, confirmed by a second white candlestick closing higher than the bullish engulfing candle.

Acting on a Bullish Engulfing Pattern

Ultimately, traders want to know whether a bullish engulfing pattern represents a change of sentiment, which means it may be a good time to buy. If volume increases along with price, aggressive traders may choose to buy near the end of the day of the bullish engulfing candle, anticipating continuing upward movement the following day. More conservative traders may wait until the following day, trading potential gains for greater certainty that a trend reversal has begun.

Limitations of Using Engulfing Patterns

A bullish engulfing pattern can be a powerful signal, especially when combined with the current trend; however, they are not bullet-proof. Engulfing patterns are most useful following a clean downward price move as the pattern clearly shows the shift in momentum to the upside. If the price action is choppy, even if the price is rising overall, the significance of the engulfing pattern is diminished since it is a fairly common signal.

The engulfing or second candle may also be huge. This can leave a trader with a very large stop loss if they opt to trade the pattern. The potential reward from the trade may not justify the risk.

Establishing the potential reward can also be difficult with engulfing patterns, as candlesticks don’t provide a price target. Instead, traders will need to use other methods, such as indicators or trend analysis, for selecting a price target or determining when to get out of a profitable trade.

Trading Tweezers

Candlestick patterns can frequently occur in financial markets, and tweezers are no exception. Based on overall conditions, their appearance can be unimportant or tradeworthy.

Suppose that an overall trend is in place, then tweezers occur during a pullback. That signals a potential entry point. The pattern indicates that the pullback is over. Now, the price is likely to move in the trending direction again. By using tweezers in this manner—entering on pullbacks in alignment with the overall trend—the success rate for these patterns improves.

For a bottom pattern, a stop loss can be placed below the tweezers’ lows. For a topping pattern, the stop can be placed above the tweezers’ highs. Tweezers do not provide a profit target, so the target must be based on other factors, such as the trend and overall momentum.

Figure 4. Using Tweezers to Enter on a Pullback in Alignment With Longer-Term Trend.

In Figure 4, the trend is up, so when bottoming tweezers occur in a pullback, it marks a potential entry (blue circle). The blue horizontal line marks the stop level, placed just below the lows of the pattern. Stops are particularly useful with tweezers because they can often be set close to the entry point. That usually means small losses if the trade goes the wrong way.

Using overall trend analysis and other indicators will help spot tweezers at points on the chart where it makes sense to trade them. Tweezers that occur near major support or resistance levels also provide trade signals that may appeal to traders. Those patterns indicate that the support or resistance has helped. Now, the price is likely to move away from the area.

The Bottom Line

A tweezers top is when two candles occur back to back with very similar highs. A tweezers bottom occurs when two candles, back to back, occur with very similar lows. The pattern is more important when there is a strong shift in momentum between the first candle and the second. For trading purposes, these patterns are best used to indicate the end of a pullback, signaling a trade in the trend’s overall direction. A stoploss can be placed below a tweezers bottom and above a tweezers top.

However, no pattern is perfect, and a tweezers pattern doesn’t always create a reversal. Use the candles that occur after the pattern to confirm short-term reversal signals. Practice both spotting and trading tweezers before initiating tweezers trades with real capital.