Engulfing Bar at Pivots – Trading Strategy

Traders familiar with candlestick patterns would know that the engulfing bars are perhaps one of the most strongest of candlestick patterns. Besides, they are also visually easy to spot. The engulfing bars usually represent short term bullish or bearishness in the pair. Trading these patterns by themselves, while might not give consistent results, using these price patterns along with other indicators can ggreatly improve the odds.

Engulfing Bars at Pivots

This trading strategy is based on pure price action and makes use of pivot points for references. It works off a 1-hour chart, although can be used on H4 as well. For the pivot points, we make use of the weekly pivot points as reference, or monthly for H4 chart interval.

Long Positions:

A long position is initiated when a bullish engulfing pattern is identified near any of the pivot levels. Although long positions are more preferred when a bullish engulfing candle is formed near S1, S2 or S3.

The stops for these long positions is placed a few pips below the low of the engulfing candle and the closest pivot price is taken for the take profit level.

The chart below is that of AUDJPY, H1 and shows how a bullish engulfing pattern is formed near S1, with a target back to the weekly pivot level at 95.26.

Engulfing Bars, Pivot: Long Trade Example
Engulfing Bars, Pivot: Long Trade Example

After the bullish engulfing candle is identified at Weekly Support 1, a buy entry is initiated at the high of the engulfing candle. The stops are set to the low of the engulfing candle, while the target is set to the weekly pivot, which forms the nears upside reference pivot.

Short Positions:

For short positions, looking for bearish engulfing patterns, preferably near R1, R2 or R3. The stops are placed at the high of the engulfing candle while the target is set to the immediate pivot reference level.

The chart below shows a short trade on EURAUD, H1 charts.

Engulfing Bars, Pivots: Short Trade Example
Engulfing Bars, Pivots: Short Trade Example

After a bearish engulfing pattern was found at R2, a short position was initiated at the low of the engulfing bar with the high coming in as stops. The target for this short trade would be R1.

Engulfing Bars at Pivots – Notes

In order for this method to produce consistent results, make sure the following criteria is always met.

  • Long positions must be taken only near S1, S2, S3 and Short positions must be taken only near R1, R2, R3
  • The engulfing bar MUST interact with the pivot. In other words, the engulfing bar must cut across the pivot and should close above the pivot (for long positions, at S1, S2 or S3) or should close below the pivot (for short positions at R1, R2, R3)
  • Always cover trade to break even when price moves 50% of the path
  • Do not trade when price is near the mid-pivot point
  • It is preferable to trade when there are no news releases within the next couple of hours after taking an entry

Why trade the Engulfing Bars at Pivots

Advantages

  • Engulfing bars are easy to spot
  • Tight risk with wider rewards
  • Works on H1 chart and thus offers plenty of trade opportunities
  • Works regardless of the main trend

Disadvantages

  • Wide spreads can play havoc with what would seem an otherwise safe trade
  • Trading before or after news release can possibly increase the risks of the trade