Engulfing means if a candle’s body is larger than the neighbouring candle’s, thus it “engulfs” the other candle. The classical examples are the bearish engulfing and the bullish engulfing candles. These occur when the current candle engulfs the previous one. It is ideal if the current candle’s body is bigger than the whole previous bar including its shadows. However, it can also be a valid engulfing pattern if the shadows of the previous bar are longer than the body of the current candle.
In case the previous candle endgulfs the current one, we talk about a harami. We differentiate – of course – bullish harami and bearish harami. Both patterns are relatively powerful trading signals and also appear quite often.
In case the current “engulfed” candle is a regular doji, it is called a bullish harami cross candle formation or a bearish harami cross pattern. These candles appear less often.
The engulfing phenomenon is a rather significant signal in technical analysis regardless which candle engulfs the other. In the second case – when a harami forms – it rather means some kind of indecision. After a strong trend, or a retracement this may mean reversal. In the case of bullish and bearish engulfing candles however it is already a powerful move against the established direction.
The size of the bars is also an important factor. Many times engulfing candles are tiny. This has to be considered when entering a trade. The bigger the candles in the formation compared to the preceding few candles, the more reliable the signal. It makes sense to ignore these formations under a certain size, especially in after hours trading.