Some of the simplest technical analysis patterns to recognise in cryptocurrency trading are engulfing candles and harami candles. Both signals are formed by only two candles and are expected to signify a price reversal. There are bullish and bearish variants of both. To explain how to spot these trading patterns and what to expect to follow, we are going to assume that you already know and understand how to read a candlestick chart.
A bullish engulfing candle follows a market downtrend. It is formed by a green candle whose open is lower than the previous candle’s low and close is higher than the previous candle’s high. In simple terms, the candle “engulfs” the candle which comes before it. The fact that this bullish engulfing candle is green and follows a downward movement from the previous candles suggests that the market momentum will shift to an upward motion.
On the contrary to the bullish engulfing candle, a bearish engulfing candle follows a market uptrend. It’s formed by a red candle which engulfs the candle before it. The fact the engulfing candle itself is red and that it follows an upward trend suggests that the momentum of the market is about to shift to bearish, hence the name “bearish engulfing candle”.
Like a bullish engulfing candle, a bullish harami candle follows a period of downward movement. Where it differs is that instead of engulfing the candle which comes before it, the harami candle is engulfed by the previous candle. Its low is higher than the low of the previous candle and its high is lower than the high of the previous candle. As is true with the engulfing candles, harami candles suggest a market reversal so we can expect the downward movement before a bullish harami candle to shift to bullish shortly afterwards.
Predictably, a bearish harami candle is formed by a red candle following a period of upward momentum which is fully engulfed by the candle which comes before it. The same as a bearish engulfing candle, this pattern suggests that the uptrend will reverse and become a downtrend.
When should we trade engulfing and harami candles?
With these T.A. patterns consisting of just two candles, we are far more likely to see them on the chart than other recognised signals such as a bull flag or a cup and handle. It is for this reason that we should never act on an engulfing candle or harami candle alone. It’s always preferable to stay cautious and use a collection of different trading methods to predict what is going to happen next. Charting patterns are not a crystal ball, they are an indicator, and we should use them as such.
A candle which completely engulfs the one before it is called an engulfing candle. If it follows a visible trend in one direction, we can expect a possible reversal in momentum. A candle which is engulfed by its previous candle is called a harami candle. This also suggests a market reversal if it follows a market trend. Trading based on engulfing or harami candles alone is not recommended due to the frequency in which they may appear on the charts. It’s best to use these patterns in conjunction with other, more reliable patterns to better your trading.