Trading A Large Engulfing Bar

By January 12, 2012Articles

Engulfing bars happen on the charts often enough, but this one in particular caught my attention for a number of reasons. It was a trade made for a professional trader. It was a very large candle on the H4 chart. So much so that one H4 bar covered the range of the entire day. Another reason is it took more than a few days to wait for the entry so planning and patience were involved. It took more than a normal amount of analysis combined over many days. And it had an extra large profit potential. Let’s take a look at what transpired from the time the large engulfing bar emerged to the entry for a trade.   Looking at the D1 and H4 chart for the day that the big bar was created, it was plain to see that a break of the low of that candle was going to be a big event. We can see the high of the EB (Engulfing Bar) was formed when it ran into horizontal resistance from the late November swing low.

EUR/JPY Engulfing Candle Daily Chart

So now we’ve recognized that this EB could mature into a top shelf trading opportunity. What do we do next?   We know that with an EB this large we have to wait for the low to be broken a retested. Immediately we put EUR/JPY on our watch list. What I’ll do is set an alert to be sent via email and SMS (text) to my cell phone when the low is broken. I don’t ignore the pair until that happens, but it helps to alert me if it happens between H4 candles. We now have begun monitoring the pair, waiting patiently like a spider in it’s web, for the pair to show us an excellent entry.   We’ve monitored it now for four days on the D1 chart and it’s looking very promising with our last day being a doji with a lower low. Why? Inside bars are being formed with lower highs. Basically, a wedge is being formed with candle highs being squeezed lower each subsequent day. It’s time to move down to the H4 chart again and take a closer look.

 

EUR/JPY H4 Chart

 

We can see clearly the wedge that was forming prior to the break of the low on the fifth daily bar. The H4 bar that broke the low did so by just enough to set up a perfect entry IF price is rejected on a pullback to retest the low. We need to move down to the H1 chart for this price action and to possibly get a better entry.

 

EUR/JPY H1 Chart

 

At this point we can see where our entry and stop loss will be placed, so it’s just a matter of quickly calculating our risk to determine our position size and placing an entry 1 pip below the low of the candle that broke the large EB low (light blue line). Profit should be set to a least 1.5:1 or greater reward to risk. In this example, because there is no nearby swing high below the entry, we’ll have to wait for a swing low to be made, then a pull back, and then see if the move has enough selling power behind it to push down through the swing low. We have the option of monitoring our profit target and moving it lower if desired.   I hope this article on how to trade a large inside bar was helpful.

 

Please leave a comment below if there are issues you would like me to explain in greater detail.

 

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