How to draw supply and demand zones when engulfing pattern forms the base?

Zone Drawing for Engulfing patterns

Find below the most common candlestick patterns we will be using to draw our bases that are the launching pad for imbalances. These formations are no different in commodities and Stocks and indexes

• Engulfing patterns
• Piercing patterns (bullish and bearish, the bearish one is known as ‘dark cloud cover’)
• Harami patterns
• Dojis
• Morning Stars and Evening Stars

Note: A candlestick pattern is useless if its location is not correct, where it happens is the most important variable.

If I had to choose one pattern or candle that has the most significance it would be the Bullish and Bearish Engulfing patterns, as they are the building blocks of potential future trend, which you will realize in future lessons.

IMPORTANT NOTICE: I didn’t invent these candlesticks names, they were chosen a long time ago by those who created and translated these patterns, you can call these patterns haramis, piercing, Tetris, or XYZ, it doesn’t really matter. They are all part of peaks and valleys, swing highs and lows, and pauses (CPs), that’s all we want and need to know. You can call these patterns any name, that will not affect your trading decisions or understanding of the rules, it’s just irrelevant. We just need to understand what is going on at these swings, their names won’t change what is going or what could possibly happen at those formations. Do not get obsessed with these candlestick patterns, you must understand what is going on at valleys/peaks and CPs, that’s all, you must understand the logic behind it. If the definition of these candlestick patterns slightly differ from what you’ve learnt or understood so far, please don’t lose any sleep over it, it’s just irrelevant. Be flexible and try to understand the logic and dynamics in these patterns, and what is even more important, where these candlesticks are happening.

In this lesson we will be focusing on the first of the three most common candle patterns we see on a base, which are “Engulfing patterns, Piercing patterns and Haramis

WHAT IS AN ENGULFING PATTERN?

What are engulfing bars? The engulfing bar formation consists of at least two candles, where the second candle completely engulfs the previous one. The signal that the engulfing bar formation provides is, depending on whether the second bar is bearish or bullish, either a reversal or a continuation.

Engulfing patterns like all candlestick patterns have many different looks and as a rule of thumb an engulfing pattern is defined as a candle that closes higher than the previous candle’s body high (bullish engulf) or lower than the previous candle’s body low (bearish engulf). If it closes above the high rather than above the body or below the low rather than below the body, then the engulfing pattern will even be stronger. The candle that engulfs the prior candle shouldn’t be a 50% candle.

• If the pattern is located at a higher Timeframe Supply/Demand Zone gives this pattern an even higher probability of success
• As mentioned above, the ERC candle needs to engulf (close above) the previous candle’s body. The shadows (tails and wicks don’t need to be engulfed but if that happens as well then even better). Of course the opposite is true for a bearish engulfing pattern
• More than one candle can be engulfed, however one is the minimum requirement
• If the proceeding candle has a tight base and is not a 50% candle gives the pattern more odds
• As highlighted before, the engulfing candle should be an ERC candle not a 50% candle with a solid body

You can find more information on these patterns by getting a copy of one of the many Steve Nison’s books on candlestick patterns. Be careful though, you can get lost among so many different formations, you might fall into a trap, in a never-ending loop where obsession will kick in and you will see reversal patterns everywhere on the charts. We just need a few so don’t panic.

Engulfing patterns are very common on CP’s (continuation pattern).

HOW TO DRAW ENGULFING PATTERNS IN A MECHANICAL WAY Bullish engulfing pattern taken as an example

1. Locate a basing area where price has created a good imbalance
2. Find a bullish ERC candle that closes above basing bars
3. Bullish candle must close above previous candle’s open/close (candle’s body)
4. If there are several candles at the base with similar open/closes around the same price area then the engulf could cover all of them
5. If one of those basing candles is at a different “height”, above the previous basing engulfed candle then skip them and only take into account the ones at the same level
6. The proximal line will be right at the open/close of the first engulfed candle or further back in time if there is no candle closing above/below the first engulfed candle’s range
7. The distal line will be at the lowest low of the engulfed basing candle(s)
8. The engulfed candle can be either a 50% candle or a non 50% candle

Once you find a basing candle or an engulfing candle closing above/below previous candle’s high/low (depending whether it’s demand or supply), we should stop looking for bases and draw our proximal line.

Once price breaks and closes away from the basing area the new basing candle won’t be considered as part of the base since it’s at a different height.

HOW TO USE THE ENGULFING PATTERNS

1. They are the building blocks of a trend
2. They usually happen at the end of an uptrend/downtrend
3. Engulfs can also be momentum candlestick formations, when that happens a new trend will be under way
4. Engulfs usually happen at higher timeframe supply and demand zones
5. They can happen at flip zones and previous SR/SD zones that are being revisited.
6. Engulfs are very common on CPs as well. When we see engulfs at flip zones, price might be getting ready for a bigger retracement or even a reversal
7. Don’t use engulfs in the middle of nowhere, these patterns are good reversal candlestick patterns but they need to be at bigger timeframe zones for higher probability trading

Find below a couple of scenarios on how to draw the based for imbalances based on the engulf  patterns. These are just two scenarios. Remember that basing will happen in many different shapes, you have up to 6 candles at the base, shorter/longer wicks, multiple candlestick formations, etc. Each base is different and as such it should be treated independently.

Sample 1:

Sample 2:

Sample 3:

For more details and examples, refer this video: