Engulfing patterns are considered to be either bullish or bearish. Technical traders use them as reversal signals. A basic engulfing bar pattern happens when a candle on the chart completely “engulfs” the previous candle or candles. This can indicate a change in sentiment which may in turn be a sign of a reversal in the current trend direction.
Without filtering of some kind engulfing bars are quite common on any chart and the weaker cases often don’t provide a useful signal. For this reason the indicator has three settings to help filter out the weaker engulfing patterns.
The diagram below shows a typical engulfing candle setup.
Very small engulfing bars are not usually significant and traders usually ignore them. Therefore the first setting that can be controlled is the size of the bar. If any cases occur which are below threshold (minimum engulf bar size) they will be discarded. The threshold setting is in points. This threshold should be set according to the chart you are trading. For example the 5 minute chart will require a much smaller threshold than the daily chart.
Setting a bigger threshold size means only the stronger engulfing signals will be shown.
The second setting is the number of engulfed bars. Engulfing patterns are usually defined such that the current candle engulfs the previous one bar. The “engulfed bars” setting allows you to extend this to more than one bar. For example with a setting of 10 the current bar must engulf the previous 10 bars to be considered valid. As an example see the figure below.
Finally the depth setting lets you control the distance the engulfing bar must extend below (above for bullish) the enfulged candle.
A candle cannot be classified as engulfing until the bar is complete. That is, both the open and close price levels need to be set. This means the indicator will always lag by one bar. When a detection is made the arrow is drawn on the previous bar (engulfing bar) not the current bar.
The indicator can create an alert whenever a viable engulfing candle is found. The alerts can be either:
- Popup window in Metatrader terminal
- Email message (via Metatrader email)
- Text message (via Metatrader SMS alerts)
Detections are also displayed graphically on the chart. See below.
Minimum engulf bar size (in points): The threshold size for accepting an engulfing bar. Bars below this size will be ignored.
Number of engulfed bars: This is the number of trailing bars the current bar should engulf. For example, with a setting of 3, this means the current bar must engulf the previous 3 bars. The default is one bar.
Depth: Amount in points that the engulfing bar must extend below/above the enfulged candle.
Type of engulfing pattern: The choices are open/close or high/low. The default (and standard method) is to use the open/close price.
Send terminal alerts: When this setting is on the indicator will create an alert popup in the MT4 terminal whenever a new engulfing pattern is detected.
Send email alerts: When this setting is on the indicator will send an email message whenever a new engulfing pattern is detected. To use this you must have an email address and SMTP server defined in your Metatrader options menu.
Send mobile (push) alerts: When this setting is on the indicator will send a text message whenever a new engulfing pattern is detected. To use this you must have push notifications setup in your Metatrader options menu.