Alright, I've been talking about this for a couple of weeks and here it is!
This is the first in a series of studies that I'm going to be doing on building trading systems. It is a little different than what you are used to on other sites.
Keep in mind that regardless of what we find in these studies, the following always applies:
- You are 100% responsible for your own trading, win or lose
- These studies are not suggesting that you trade Forex with real money
- Past performance does not guarantee future results
- Even if two traders trade the exact same system, their results will always be different
- This is not an actual trading method, only a study
If you want to find out how I created these studies, read my post on historical Forex data and intro to trading systems development.
In This Study
To kick things off, I'm going to dig into the Engulfing Candle pattern on the EURUSD weekly chart.
First, I will show you how to find all of the Engulfing Candles on the weekly timeframe.
This will help identify possible opportunities, as well as false positives.
Then I will graphically identify all the times when the pattern happens at support and resistance levels.
At this point, we will NOT be formulating an actual trading plan.
We simply want to observe the opportunities without any biases.
In later posts I'll show you possible trading methods that can come out of this research.
But for now, keep your mind open and don't try to trade this because it is not an actual trading method.
We are just getting started.
Indicators
If you want to test this yourself, we have two indicators available:
- Metatrader 4 Alerts Indicator – When you install this indicator in Metatrader 4, it will send you an alert via your choice of audio, screen, text, email or push notification.
- Forex Tester Indicator – Marks all engulfing candles on the current chart. Makes it much easier to spot them during backtesting.
The Trading System Development Process
This may seem kind of boring right now, so let me give you a roadmap of where we are going with this.
- Study – First we will do a study of the pattern to get a rough idea of the potential of the pattern. That is what this post will show you.
- Formulate – If our results look good in this study, we will create a very basic trading plan that could possibly be profitable.
- Backtest – Then we will backtest the strategy several times to find out the potential that our newly formulated strategy has. If it doesn't work in backtesting, then we have to go back to the Formulate stage.
- Demo – Should several rounds of forward testing in a demo account. Don't risk any real money at this point.
- Trade It – Finally, you need to make the decision as to if you want to trade the method with real money or not. Only you can make that choice.
All Weekly EURUSD Historical Engulfing Patterns
Here is a spreadsheet with all of the weekly Engulfing Patterns from 2001 until last month.
Click here to download it and follow along at home.
It is an Excel file and the highlighted lines are the engulfing candles. The lines with a “1” at the end are the candles that I will be examining below.
I used Forex Tester to screenshot all the charts. All measurements are not exact, but are close enough for study purposes.
During actual testing I will be more exact.
Alright are you ready? Let's get started…
May 13, 2002
Risk: 165 pips
Possible Reward: 3750 pips
Potential: 22.7R
Weekly
Notes: A lot of potential in this one. There is a possibility that you may have exited early on the first major retracement. Either way, this trade has a lot of potential.
Daily
Notes: There is also an engulfing pattern on the daily chart. This should be a confirmation signal to get into the trade.
December 2, 2002
Risk: 271 pips
Possible Reward: 3567 pips
Potential: 13.2R
Weekly
Notes: Huge risk reward potential here.
Daily
Notes: The pin bar at support would be a good place to get in.
June 16, 2003
Weekly
Risk: 373 pips
Possible Reward: 846 pips
Potential: 2.3R
Notes: This isn't really a great signal because there is not a clear resistance level. But I would thought that I would throw it in because it is a trade that one might take. It is a bad trade because it is against the trend and there is not much separation between the peaks.
Daily
Notes: The trade looks much better on the daily chart, but it probably wasn't a good trade to take. As we have noticed with the other charts, there is also an idea engulfing pattern on this chart too.
September 1, 2003
Weekly
Risk: 340 pips
Possible Reward: 2564 pips
Potential: 7.5R
Notes: Resistance becomes support. Really nice continuation pattern.
Daily
Notes: Not a real strong signal on the daily chart. I supposed you could have used the double bottom as a signal to enter the trade. The only issue with this is the second low is lower than the first.
February 16, 2004
Weekly
Risk: 445 pips
Possible Reward: 750 pips
Potential: 1.7R
Notes: Fighting the trend a little on this one. It is a decent setup though.
Daily
Notes: Again, we see a double top with an Engulfing pattern, just before the drop.
October 11, 2004
Weekly
Risk: 269 pips
Possible Reward: 1177 pips
Potential: 4.4R
Notes: This one might have been tough to enter because it is not that obvious. The pin bar before it is a good sign that price might be moving up soon.
Daily
Notes: We see a nice pin bar at the trend line. That would be ideal place to enter.
October 3, 2005
Weekly
Risk: 259 pips
Possible Reward: 0 pips
Potential: 0R
Notes: The first loser so far. It is a decent potential double bottom on the weekly chart. If we entered with a buy stop above the Engulfing candle, it would have kept us out of this trade.
Daily
Notes: We don't see any of the patterns that we saw in the previous setups. There are no pin bars or engulfing bars at the support level.
February 27, 2006
Weekly
Risk: 383 pips
Possible Reward: 3917 pips
Potential: 10.2R
Notes: Huge potential return on this trade. There is also somewhat of a head and shoulders pattern at the bottom.
Daily
Notes: No good signal on the daily chart. Funny thing is that it looks almost exactly the same as the chart from October 3, 2005.
June 5, 2006
Weekly
Risk: 387 pips
Possible Reward: 125 pips
Potential: 0.32R
Notes: Not the best entry signal, but it is one that one might take. It is important to evaluate these marginal signals too.
Daily
Notes: Nice pin bar Engulfing candle on the daily chart. There would have been a good R multiple if the trade was taken on this timeframe.
September 3, 2007
Weekly
Risk: 238 pips
Possible Reward: 2229 pips
Potential: 9.4R
Notes: This one isn't as pretty as some of the others, but it could get the job done, if you took the trade.
Daily
Notes: There is a pin bar here that could have been a good secondary indication to get into the trade. Trend continuation play here.
October 22, 2007
Weekly
Risk: 286 pips
Possible Reward: 1597 pips
Potential: 5.6R
Notes: This is a trend continuation play. Not sure if it would be a good place to get in, but it would have been very profitable.
Daily
Notes: No good confirming signals here. Not that there has to be, but it is nice to see.
January 14, 2008
Weekly
Risk: 346 pips
Possible Reward: 250 pips
Potential: 0.72R
Notes: This is similar to a couple of the tops that we have seen before, but it did not work out as well. There was some room to profit here however. It just depends on how the trade is setup.
Daily
Notes: Nice bearish engulfing pattern at resistance.
December 29, 2008
Weekly
Risk: 422 pips
Possible Reward: 1506 pips
Potential: 3.6R
Notes: Big spike into support, turned resistance.
Daily
Notes: Nice double top formation with pin bars.
May 18, 2009
Weekly
Risk: 650 pips
Possible Reward: 1097 pips
Potential: 1.7R
Notes: Continuation pattern that may have been hard to enter. Price is heading into a resistance zone.
Daily
Notes: Nice bullish engulfing patter on the daily chart though. Perfect place to enter.
July 27, 2009
Weekly
Risk: 321 pips
Possible Reward: 830 pips
Potential: 2.6R
Notes: Another continuation pattern trade. Really tight setup, but it is a good one.
Daily
Notes: Not much of a signal on the daily chart.
August 17, 2009
Weekly
Risk: 334 pips
Possible Reward: 789 pips
Potential: 2.4R
Notes: Another nice engulfing pattern in congestion. Good continuation pattern.
Daily
Notes: Double bottom on support line, resistance became support.
March 15, 2010
Weekly
Risk: 321 pips
Possible Reward: 1632 pips
Potential: 5.1R
Notes: Another continuation setup, good profit potential.
Daily
Notes: No good confirming pattern on daily chart.
June 28, 2010
Weekly
Risk: 415 pips
Possible Reward: 2382 pips
Potential: 5.7R
Notes: Pretty good setup with deep punch into support level.
Daily
Notes: Strong break of the support line on the daily chart.
January 3, 2011
Weekly
Risk: 536 pips
Possible Reward: 15 pips
Potential: 0.03R
Notes: This would have been a losing trade, nothing wrong with that. Take the loss and move on.
Daily
Notes: Engulfing pattern in the opposite direction. Could be a sign that the trade won't work.
January 10, 2011
Weekly
Risk: 522 pips
Possible Reward: 1632 pips
Potential: 3.1R
Notes: Internal support line, this would be a trade that might easily be missed. Might also be hard to take a trade in the opposite direction after previous loss.
Daily
Notes: Nice engulfing pattern on daily chart.
August 29, 2011
Weekly
Risk: 432 pips
Possible Reward: 2102 pips
Potential: 4.9R
Notes: Pretty nice tip off before the price drop.
Daily
Notes: No good signs of confirmation on the daily chart.
April 30, 2012
Weekly
Risk: 326 pips
Possible Reward: 932 pips
Potential: 2.9R
Notes: Nice downward trend, third touch of the trendline.
Daily
Notes: Dojis with strong confirming candle at the trendline.
July 8, 2013
Weekly
Risk: 314 pips
Possible Reward: 936 pips
Potential: 3.0R
Notes: Strong confirmation of support level.
Daily
Notes: Even stronger confirmation on daily chart.
February 24, 2014
Weekly
Risk: 154 pips
Possible Reward: 211 pips
Potential: 1.3R
Notes: Small continuation pattern.
Daily
Notes: Nice rejection of support line.
May 5, 2014
Weekly
Risk: 216 pips
Possible Reward: 3304 pips
Potential: 15.3R
Notes: Small double top, like we have seen before. Very nice profit potential.
Daily
Notes: Strong rejection with pin bar formation.
September 15, 2014
Weekly
Risk: 182 pips
Possible Reward: 2362 pips
Potential: 13.0R
Notes: Continuation in trend. Nice gap after engulfing pattern.
Daily
Notes: Strong down candle on daily. Good confirming signal.
November 17, 2014
Weekly
Risk: 238 pips
Possible Reward: 1896 pips
Potential: 8.0R
Notes: Good signal in a trend.
Daily
Notes: Ranging pattern, followed by a strong drop.
December 15, 2014
Weekly
Risk: 363 pips
Possible Reward: 1737 pips
Potential: 4.8R
Notes: Another good opportunity to short into the trend. Could really make some money by stacking trades.
Daily
Notes: Strong rejection on daily chart too.
March 2, 2015
Weekly
Risk: 409 pips
Possible Reward: 352 pips
Potential: 0.86R
Notes: Probably too risky to take this trade so late in the trend.
Daily
Notes: No real strong confirming signals on daily.
Conclusion
Again, the goal of this study is simply to examine this pattern on the weekly chart for the EURUSD. In a future post, I will examine potential trading methods, based on this study.
After looking at these results, what kind of trading system do you propose?
Is there anything that I missed? Did I have too much positive or negative bias?
If you would like to help with these studies, please contact me.
Leave a comment below…
Disclosure: I do get a commission if you buy through some of the links on this page. But it does NOT cost you anything extra, it helps pay for my hosting costs and a portion of the proceeds go to my charity partner.
Hi,
Trading the Weekly engulfing candle is of course profitable. You can ask to Colin Jessup and you’ll see 😉
But the engulfing bar is just the pattern to enter the market. You have to consider the context of the price action (S/R levels, trend, …) if you want high-probability setups. I can guarantee you that it is profitable to trade it on W1, D1 and even H4 (with good context visualization) timeframes, I backtested successfully it since 2000 and it’s the basis of my trading system…
Thanks for the input. There are no guarantees in trading 🙂
Of course, there are guarantees in trading. Otherwise, I could not earn money consistently…
You just have to find the good system 😉
Congratulations for your study!
To prepare a trading system based on this results, one must be very careful. But at least this can be a trending signal for trades to be placed on a daily and 4H charts.
Thanks for your work.
Misael
Thanks Misael! Yeah, not sure how a trading system will actually play out, but this is a good start.
Hia Hugh
Do not have much time on this sunday evening preparing for the week ahead.
Can not recall how i’ve found out about your website . Thoroughly enjoyed some podcast like the one with Kim Komprass.
I wanted to leave this post in regards to the “legendary Paul Rotter” .
for the readers who question the “ruth” of the story , He is a “real person” and yes he’s made tons of money flipping his orders. I was at a traders meeting in the city ( UK), in 2003 with some of the big traders, former Liffe floor traders from my firms who started to complain loudly to the guest speaker about the “flipper”. He was sitting right behind us ! 🙂
I admire his strength in respect to being capable of putting that kind of size on and the speed he executed. However , I do not admire the “method” that is more than questionable ….if that can be called a method or even a trading plan or trading mastery. That’s not trading to me , but he definitely possess nerves of steel !
Last but not least, one of my ex colleague/ friend used to trade about 500 lots in the bund market and he got warned several times by the risk management that Eurex would fine fine him 200 K for “market abuse” . So as of 2014 ( for sure) this kind of “trading approach” is no longer allowed i believe at least when done “by hand” and not HFT ..see what is happening to that poor guy arrested in his sleepers for supposedly causing the flash crash from his basement in the UK doing exactly what “the flipper was doing”
Paul Rotter was lucky that he did at that time. Everyone used to complain comparing him to a “con man” flipping his coins rather than trading based on a “view” or knowledge or an edge….still that’s incredible because passed a certain size I am .
keep on the good work !
Hi Malen,
Thanks for the input! Really cool that you were there. I read about that incident. Yeah, I have it from a credible source that they have evolved their style to keep up with the times.
You bring up an interesting question of that is really trading or not. I think it is…
To me, trading is figuring out inefficiencies in the market and exploiting them for profit. That can be a chart pattern or a “flip.” The great part is that arbitrage-like opportunities like that tend to go away once people figure them out.
Just my opinion, of course…not trying to argue or anything.
Thanks for stopping by and I hope your trading is going well!
Cheers,
Hugh
I did some testing of engulfing patterns across 13 markets over 10 years (eurusd, eurgbp, gbpusd, audjpy, gold, corn, soybeans, us 10y bonds, bunds, nasdaq, russell 2000, euro stox 50). I have not found an edge that holds up over time and across markets. The best strategy for eurusd was to take long positions on bullish engulfing candles until a bearish engulfing candle appeared, and vice versa, and to filter long/short trades based on the 20 sma. I’ll be interested to see if you find other more effective strategies.
Clay! Thanks for the input.
Yeah, I had the same thought with a 25 EMA to filter signals. Didn’t work so well.
The trouble with weekly candles is there isn’t really much data and you kind of end up memorizing most of the setups. Daily or 4H would be a more reliable test (but a bitch to write a blog post for 🙂 )
So far, stacking on the first two candles after the initial signal seems to be really profitable. Also, it looks like there would need to be two accounts to trade the longs and shorts at the same time.
Thanks again and I’ll have more soon…
Cheers,
Hugh
does engulfing bar also applicable for 4hr chart?
Test it and let me know what you find. I haven’t tested it yet 🙂
Hi Hugh,
Nice to see you are back, a very interesting study, I have done similar studies with the Doji on the weekly, daily and 4 hourly with similar results. Keep up the good work and I look forward to your next post.
Regards
Nigel
Hi Nigel,
Thanks for the input!
Excellent study Hugh. Anything about how the EURUSD moves is of great interest to me. Although I don’t trade systems, any long term biases may be extremely helpful. Cheers
Cool!
I think that you are off to a great start. I tried doing the same thing awhile back but on a daily and 4h time frame. But didn’t stay focused enough to complete what I had started. I work a 8-5 job (hate it).
Please keep us informed on your findings. I think that this could be a very profitable system.
Will do Abner.
Hey Hugh,
Thanks for the insightful tips. I have only been trading for 6 months but I have taken a big interest in price action trading. I spent the first 5 months of my trading wasting my time looking at indicators; MACD, RSI, CCI, Stochastic, EMAs etc etc etc… I even looked into robots.. Bad decision making..
The best way to trade I’ve seen to date is price action; engulfing candles, pin bars and support/resistance and Fibonacci. The best time frame is the daily, as you mentioned, using the weekly and monthly to identify trend and trend changes. I really like this presentation on how to use the weekly engulfing candles/pinbars to predict the coming trend in the daily. The system I would propose is in what I’ve written above. Wait for your engulfings/pinbars on major supports. Check for engulfing candles on the daily charts in the direction of the weekly. After a daily engulfing place a pending order 10 pips away from the close of the daily engulfing. I would also advise using a ‘break even’ EA set at 40 pips and 5 pips. When your trade goes 40 pips into profit your stoploss is automatically dragged to 5pips in profit. Of course a person can decide on the pip value themselves. I picked up a lot of information for websites similar to yours. You guys are the traders that people, like myself, should be listening to… Period !
Great blog site. I’m learning as I go and one day I hope to make this a full-time income working only on daily charts. Daily trading is the most relaxing way to trade, 10pm GMT I place my trades based on solid evidence, breakeven EA takes care of the rest. During the day I might check the 4H charts to see if there is a possible turn-around coming. So I only need to see my computer for about 1 hour each day. I’ve done all that 5m and 15m trading/gambling… Not for me anymore… High probability trading on higher time frames is the way to go with no indicators.
Keep up the good work and spreading the word on the true art of trading 😉
Eddie
Hey Eddie,
Thanks for stopping by and the ideas! I’ll certainly try that. Let you know how it goes.
Yeah, unfortunately most of us have to go through a process before we finally discover what works for us. No shortcuts 🙂
Cheers,
Hugh
Hi Eddie,
Are you still trading as you explained here 3.5 years ago, using the engulfing candles on the daily charts.
I have been doing a lot of back testing myself which showed that these candles are quite rare on the daily charts (maybe 2 -5 signals per year per pair), the most reliable time frame I have found is the 60min.
Which pairs do you trade?