How to Make Money Trading with Candlestick Charts

Bullish Engulfing signal with

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heavy volume indicates possible trend
reversal
Finally, 
Figure 6.5
 shows IPCL reversing its
downtrend after a small bullish engulfing
signal. Even though the engulfing candle is
very small, it is still a bullish engulfing
signal. The reader can also observe another
bullish engulfing signal in the chart in late
September which starts the next phase in the
up trend.

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Figure 6.5:
Bullish Engulfing signal
reversing IPCL’s downtrend

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Bearish Engulfing
Description
Figure 6.6
shows a classic Bearish Engulfing
signal. As is seen, the signal is formed when
a dark body completely engulfs a white body.
Figure 6.6:
Bearish Engulfing signal

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Criteria
In order for the bearish engulfing signal to be
valid, the following conditions must exist:
The stock must have been in a definite up
trend before this signal occurs. This can
be visually verified on the chart.
The second day of the signal should be
black and the body should completely
engulf the previous day’s white candle
body. Even if the first day is a Doji, it is
still a Bearish Engulfing signal.
Why the Reversal Works
Consider a stock which has been steadily

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moving up. The investors in the stock are
growing exuberant by the day they see the
stock go up. The bulls are happy and relaxed.
After days of continued up trend, the amateur
investors finally convince themselves of
buying into the stock. They cannot bear to
watch its price go up and not participate in
it. Again, where do most investors buy? At
the top!
This creates the long white candle of the first
day. The pent up demand makes the stock gap
up the next day. But now the smart money is
selling into the final rally. The demand of the
novice investors is constantly filled by the
supply from experienced traders. The stock
finally closes below the open of the previous
day, thus creating the dark engulfing candle.

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The bears have now taken over. The trend
has a high possibility of reversal.
Strong as the signal is by itself, the following
conditions make it more convincing:
The first day’s white candle body is very
long compared to the rest of the trading
range.
There is a spike in volume on either of
the two signal days.
The first white candle has gapped up
from the previous trend. This shows the
desperate need of the novice investors to
get into the stock.
Stochastics are in overbought condition.
The second day’s dark body engulfs more

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than one white candle from the previous
trend.
Figure 6.7
 shows another Bearish Engulfing
signal.
Figure 6.7: