Good Day Everyone, today I will be posting my assignment on the topic '' Trading Strategy with Price Action and The Engulfing candle pattern'' as taught by professor @lenonmc21.
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IMAGE DESIGNED ON POSTERMYWALL.COM
THEORY
Say in your own words what you understand about the Trading Strategy with “Price Action and the Engulfing Candle Pattern, also describe each step to be able to execute it (Place at least 2 examples in clear cryptographic assets and with your own charts mandatory) ?
Explain in your own words the interpretation that should be given to a large strong movement in the market. What does the price tell us when it happens?
Explain the trade entry and exit criteria for the buy and sell positions of the trading strategy with Price Action and Engulfing Candlestick Pattern in any cryptocurrency of your choice (Share your own screenshots taking into account a good ratio of risk and benefit)?
PRACTICE
- (Remember to use your own images and put your username)
Make 2 entries (One bullish and one bearish), using the “Price Action and Engulfing Candlestick Pattern” trading strategy. These entries must be made in a demo account, keep in mind that it is not enough to just place the images of the execution, you must place additional images to observe the development of these operations to be able to be correctly evaluated and see if they really understood the strategy.
TRADING STRATEGY WITH PRICE ACTION AND THE ENGULFING CANDLE PATTERN.
There are numerous strategies a trader can use to trade, amongst the strategies is the Price Action and the engulfing candle pattern. This two strategies can be combined and used together to effectively place a profitable trade. To start with Price Action, it is a unique strategy that enables a trader to determine an entry by studying the price and market movement. This price always form unique movements and different patterns and shape, looking at pattern of price movement and the shape of candle, a trader should be able to take a decision base on these metrics and place a trade, to increase the winnining or profit probability, one can use the engulfing candle pattern to confirm the trend and movement of price. The engulfing candlestick pattern is characterised by the formation of two candle, the second candle usually engulf the first one including the wick. However, the candle that is engulfed can be either bullish or Bearish and the engulfing candle which is bigger than the engulfed candle can either be bullish or Bearish also depending on the current state of the market. This means that we can have a Bullish engulfing pattern and a bearish engulfing pattern.
The bullish engulfing pattern is usually seen when the market is in a bearish trend while the Bearish engulfing pattern is usually seen when the market is in a Bullish trend. These two patterns predominantly indicates that there could be a strong reversal of price looming, using the price action together with this engulfing candle pattern, a trader should be able to determine the next movement of price and place an entry in that direction.
STEP BY STEP EXECUTION OF THIS STRATEGY.
The first thing we must take into cognisance is that we must look for a chart that has a clear harmonic price or trend movement. I.e the market must not be ranging or moving side ways, the strategy will only perfectly work on chart with a clear defined price trend and movement that are in harmony both in impulse and retracement.
Now after observing this chart, the next thing is for us to pick a strong price movement that is in opposite direction of the stronger or dominant trend. Remember, we were able to identify an established trend that will make our strategy work, now we are to look out for or wait and observe a new or change in price trend. This change in trend is usually characterised by formation of strong candles like 4 to 5 in a row which could be either bullish or Bearish.
Now after we have identify the new price movement in opposite direction of the dominant trend as explained in step 1 and step 2, the next thing for us to do is we should watch out for a break in price movement, this break in price could be a retracement. It is at this point of retracement we are going to observe the engulfing candlestick pattern which could be either bearish or bullish. Once we are able to pick this engulfing candle, we should mark it with a 'Horizontal line' at both ends of the engulfing candle, also we can add a vertical line, the significance of this will be explained in the next step.
At this stage, what we are to do now is to change the timeframe of the chart to a smaller timeframe preferably 5mins time frame. After doing this, we are to watch out for a clear break at the area where the engulfing candle on the previous time-frame is. The Horizontal vertical lines we used in step 3 will aid us in identifying these zones in the new time frame. Now in this new 5 mins time frame, we are to observe a price pull back again, once we are able to identify this, then we can place our entry instantly. To protect our position, we should place a stop loss and take profit levels.
CHART ILLUSTRATION
SCREENSHOT TAKEN FROM MT5
SCREENSHOT TAKEN FROM MT5
When there is a large strong movement in the market, it means the price is in a strong bullish trend or Bearish trend and to the best of my understanding, it simply shows a particular set of people are currently in control of the price momentum. It is this price momentum that investors and traders use to determine the strength of a particular bullish or bearish trend. An asset or crypto pair can exhibit a strong bearish momentum, in this case, it shows the sellers are very active and are dictating the movement or direction of price while a strong bullish momentum indicates that price is shooting up, in that case the bulls also known as the buyers have seized control of the market and they are dictating the momentum of price. Most traders take advantage of these strong movement in the market to make profitable entries in the direction of the trend.
- First thing we need to take note of so as to get a good result for both buy and sell entries is that the market structure must be in harmony, there must be a distinct picture that shows a clear upward or downward trend. This is the first criteria we must consider, any other structure like a ranging or side way price structure will render our strategy invalid.
Now, after we must have identified the clear trend, we can now watch out for 3 to 4 or 5 strong candles with a good body. This is very necessary as it validates the price movements, thereafter we can look for a retracement of price with an engulfing candle which can either be Bullish or Bearish, this particular candle is very important as it increase our chance of getting a good result.
After making sure we have gotten the engulfing candle (also known as the enveloping candle) we should mark both the upper and lower zone of the candle on the 15mins time frame (note that a smaller time frame like the 15mins or 30mins is best suited for this entry), now after marking our candle, it's now time to switch to the 5mins timeframe, what we will be looking out for here is a break in force so as to place our trade. In the course of changing the time frame, if the zone has been broken it means we need to exercise patience and wait for the price to develop and give us another setback or retracement, once we notice another retracement, then we go in and place our trade.
Now after we have identified the broken zone in the 5 mins time frame, we can place our take profit and stop loss respectively.
For a Buy entry, our stop loss must be below the bullish candle and our entry point while our 'Take profit' must be positioned above our entry point at the last support or resistance level.
For a sell entry, our stop loss must be above the Bearish candle and the entry point while our take profit must be positioned below our entry point at the last support or resistance level. We must also take into congnisance that our risk to reward ratio is at least 1:2.
SCREENSHOT TAKEN FROM MT5
SCREENSHOT TAKEN FROM MT5
BULLISH ENTRY
SCREENSHOT TAKEN FROM MT5
As seen above, I took a trade on the UNI/USD crypto pair precisely on the M15 time frame using the Price Action and engulfing candle strategy. I observed the 15mins time frame first and saw that the set up met the conditions needed. Firstly, there was a strong downward Trend as indicated on the chart, then after that we could notice a reversal with the formation of some bullish candle but prize retraced back to the downward trend after which I noticed an engulfing candle which I marked with two horizontal red lines and a vertical red line.
These set up was further confirmed on the 5mins time frame as seen below.
SCREENSHOT TAKEN FROM MT5
I proceeded to place a Buy entry after all the requirements were met and from the images above, we could see that price went in my entry direction which confirms that it was a perfect entry.
SCREENSHOT TAKEN FROM MT5
The image above shows that I made a profit of $8.52 from this trade.
BEARISH ENTRY
SCREENSHOT TAKEN ON MT5
As seen above, I took a trade on the BCH/USD crypto precisely on the M15 time frame using the price action and engulfing candle strategy. I observe that there was a harmony in the market structure with a clear downward trend been seen on the chart which I indicated on the chart. There were reversals followed by retracements at intervals and I noticed about 3 engulfing candles but I waited till price broke the support level before I placed my trade. As seen on the chart, I marked the engulfing candle just before price broke out of support level with two horizontal lines and a vertical line. This set up was further confirmed in the 5mins time frame as seen below.
SCREENSHOT TAKEN ON MT5
I proceeded to place a sell entry after ensuring all the requirements were met and from the image above we could see that price moved in the direction of my entry which confirms that it was a perfect entry.
SCREENSHOT TAKEN ON MT5
The image above shows that I made a profit of $11.19 from this particular trade.
Trading strategies that involves the combination of price action and engulfing candle pattern have overtime proven to be effective and have a high degree of accuracy, making it a very profitable strategy. Although effective, howbeit, one must be very careful to follow the principles that guide the use of this strategy, if not, there will be no positive result. Also we must never fail to use a good ratio of risk to benefit. This also goes a long way in helping our trades or entries.
This course is really an enlightening one as I have learnt something new again that will help and sharpen my trading skill. Special thanks to professor @lenonmc21 for this wonderful piece, thanks !