Candlesticks charts with bullish engulfments often signal a powerful change in direction. You will see how to make a trade with very low risk and high profit potential.
Start by looking for this.
Candlestick charts have some exotic names; engulfments, dojis, shooting stars, morning stars. Regardless of the names, candlesticks place a lot of emphasis on the relationship between the open and close.
A bullish engulfment is as follows (using the daily time frames as an example):
1) Today’s close is greater than yesterday’s open.
2) Today’s open is less than yesterday’s close.
3) Yesterday’s close is less than yesterday’s open.
That’s the “bare-bones” definition of a bullish engulfment. Here’s an example of what a bullish engulfment looks like on the daily time frame.
Early in October 2002, IBM makes a bullish engulfment – then proceeds to advance more than 40% in a month. How can we pick only the best engulfments to trade? Read on .
Be more selective for better results.
With the previous chart in mind, let’s add a few more criteria for trading bullish engulfments.
Notice that the bullish engulfment day was a large range day compared with the previous few days. In fact, it was probably the largest range day for the past month!
Second, notice that the days prior to the engulfment had lower highs compared with the previous day. There were five lower highs before the engulfment day. Those lower highs are like a coil ready to spring – as soon as trades occur above the previous day’s high the stock is ready to take off.
Finally, the next chart shows the weekly candlesticks for IBM. The day that IBM made a bullish engulfment is part of the week that the same pattern occurred. Having the same pattern show up on different time frames is a powerful confirmation signal.
Here’s how to get a head start.
This takes a little work, but the rewards can be great.
Of course, there is no way to know what day will turn into an engulfment day, but by monitoring the price action on the open you can plan accordingly.
Here’s exactly what to do:
1) Previous day needs to close down relative to the open.
2) For the next day, if the open is less than the previous day’s close, then place a buy stop order above the previous day’s open.
3) If filled, place a protective sell stop order below the lower of the previous day’s low or entry day’s low.
4) If the stock does not close above your purchase price, consider exiting the position on the close.
Trading bullish engulfments this way takes discipline – the discipline to exit a position if it does not move favorably in your direction quickly.
When it works, you are truly buying the bottom.
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*** Article by Dave Wooding of the Wooding Trading Company. Dave’s site includes useful stock market trading information. Visit https://www.woodingtrading.com for more FREE information about how the stock market works, trading tutorials and stock market education. If you would like to receive information on a regular basis, simply sign up at https://www.woodingtrading.com/stock-market-newsletter. html
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