Is the Engulfing Pattern Still Relevant in Today's Forex Market?

Engulfing patterns are a popular pattern in forex trading. This pattern is not only used by traders but also by analysts to predict reversal opportunities for short-term movements. It is said that this pattern is claimed to have a high success rate. Therefore, this pattern is taught "down through the generations" to novice traders to help them in trading.

But, even though it continues to be taught, in reality, many traders do not use this pattern when trading. Traders prefer to use other trading strategies, which are notably not found in analysis books. Usually, these strategies are a combination of several methods, both classical and modern analysis.

This then raises the question, is the engulfing pattern still relevant to be used in the current forex market conditions? If it is relevant, why don't people use it?

Probability of Engulfing Patterns

To prove whether engulfing patterns are still relevant or not to the current market, I tried to find the pattern on the XAUUSD pair on the Daily Timeframe. I looked for it from January 2020 to July 2024 and calculated how many patterns were successful and how many failed.

Bullish Engulfing

I started with the bullish engulfing pattern first. The criteria that should be for this pattern are:

1. Consists of 2 candlesticks, the first candle is bearish and the second candle is bullish
2. The open price of the second candlestick is the same or lower than the close price of the first candle
3. The close price of the second candle is higher than the high of the first candle

However, after searching for it using these criteria in the price history from 2023 to 2024, I did not find any that met these criteria. Therefore, I reduced the 2nd criterion and only used the first and third criteria.

After determining the criteria for a bullish engulfing pattern, the next step is to determine the criteria for successful and failed patterns.

A successful pattern is after the pattern is formed, the price moves bullish 1:1 with the "open price - low price" of the second candlestick. So, for example, if "Open - Low" is 100 pips, then the price after the pattern must move 100 pips.

A failed pattern is after the pattern is formed, the price does not move bullish 1:1 with "the open price - low price", but instead moves bearish to below the low price of the second candlestick.

To see where I marked the patterns, you can install this template in your Metatrader 5 terminal:

bullish engulfing template.tpl, or you can also check it manually by matching it based on the following spreadsheet data: Engulfing xauusd.csv

From 2020 to mid-2024, the bullish engulfing pattern proved to have a sufficient win rate to help traders make a profit. Although the results in 2022 were not good, in other years this pattern has a probability of over 50%. Even in 2023 and part of 2024, the bullish engulfing pattern has a probability of over 70%.

This value may not be high enough, but it is enough to prove that the bullish engulfing pattern is still relevant to be used in current market conditions. Even though this test was only conducted on the XAUUSD daily timeframe, which does not represent the conditions of all pairs in the forex market. But, at least traders can use this pattern in the XAUUSD market.

Bearish Engulfing

Next is the bearish engulfing pattern, I also don't use general criteria to identify this pattern. I only use 2 criteria as before, namely:

1. consists of 2 candlesticks, the first is bearish and the second is bullish
2. the close price of the second candle is lower than the low of the first candle

I mark successful and failed patterns and use the same criteria as when determining bullish engulfing patterns, to determine which patterns are successful and which fail.

To see where I marked them, you can install this template in your Metatrader 5 terminal: bearish engulfing.tpl, or you can also check it manually by matching it based on the following spreadsheet data: Engulfing xauusd.csv

Meanwhile, the bearish engulfing pattern shows poor performance. The probability of this pattern rising is quite volatile, sometimes only around 40% and sometimes able to reach 60%. But, overall the average probability is only around 44%. This shows that when you use this pattern, you will experience more losses than profits.

Does that mean this pattern is not worth using? Not necessarily. Measurement does use a sell scenario with a 1:1 risk reward, but the candlestick volume varies greatly. If you check how I marked the pattern on the chart, you will see some successful patterns have volumes several times larger than the failed patterns. That's why, if you use this pattern, you won't necessarily experience a loss.

To be absolutely sure, you need to do a complete backtest by entering entry prices, SL, and TP to simulate the performance of this pattern based on real trades.

In addition, some of the observation periods were years when global economic conditions were not good due to the Covid-19 pandemic. And as we know, when the market is full of uncertainty, demand for XAUUSD usually increases significantly and makes its price rise. Therefore, it is understandable that the bearish engulfing pattern becomes ineffective.

#OPINIONLEADER#