Engulfing is a Japanese candlestick pattern that signifies a change in the current trend.
“Cable” is the colloquial name for the GBP/USD currency pair, which this strategy is trading.
A medium-term strategy aiming to exploit the reversals of the trend. This strategy trades relatively frequently (on average 10 trades a week) and allows more than one position in the same direction to be opened concurrently. Apart from the classic engulfing pattern conditions, the strategy is also using an additional filter in the form of the EMA condition.
Engulfing is a pattern consisting of two candlesticks.
Bullish pattern (a buy signal) usually appears at the end of the downtrend.
It is generated for the current candle if all the following conditions are met on 1-hour bars:
- Opening price of the candle 1 bar ago is lower or equal then the closing price of the candle 2 bars ago
- Closing price of the candle 1 bar ago is higher or equal than the opening price of the candle 2 bars ago
- Opening price of the candle 1 bar ago is lower than its closing price
- Closing price of the candle 2 bars ago is lower than the opening price of the candle 1 bar ago
- Additional filter: Current ask price is lower than the exponential (i.e. more weight is given to the more recent data points) moving average from the previous bar
[graphic is coming shortly]
In short, the bullish pattern appears if the more recent candle “engulfs” the previous candle and at the same time, the price movement within the more recent candle is.
For the bearish pattern (sell signal), the signs are reversed and the bid price must be above the EMA.
This strategy is meant to enter the trade when the current trend has run its course and is about to be reversed.
The positions will be opened when the engulfing pattern is identified. For the buy/sell signals to be valid, the ask/bid price must be below/above the EMA (exponential moving average), as this indicates that the price of the instrument is currently in the downtrend/uptrend.
The strategy does not use stop-loss and take-profit orders, however the positions will be closed if the price will be moving against them for two consecutive 1-hour bars. This ensures that the losses from the false signals will be limited and at the same time there is a potential to capture large winning trades, when the sustained trend reversal is correctly identified.
Should additional entry signal in the same direction be generated, the strategy will open further positions. If the opposite direction signal will be generated, the current position will be reversed.
The ratio of winning to losing trades should be similar, with the average p/l from the winning trades being higher in the long term.
The throttle settings put a limit of only 1 signal per 60 minutes (further signals will be ignored).
As this strategy relies on identifying major trend reversals, it will perform best if there is a strong momentum in the market (either up or down).