Daily and H4 engulfing price action

You may have seen something similar to this before and I apologise if it covers some aspects of methods already described on this forum - I do not mean to detract from what is already explained by others. I would simply like to describe my recent “light bulb” experience and hope it is useful to us all.

This method uses Price Action and Momentum to identify a potential trade and place pending orders at appropriate levels. I also use Daily and H4 timeframes because it suits the time I have to spend at the computer screens.

METHOD

1. On the Daily timeframe identify an engulfing bar. For the purposes of this method an engulfing bar is one where the open and close engulf the open and close of the previous bar. Obviously you wait until the bar closes and the next bar starts before this is established.
2. Having identified an engulfing bar, highlight it’s open and close. I do this by drawing a rectangle from the open level to close level, as shown in the attachment diagram Daily TF (grey rectangle).
3. Draw a horizontal line at the high or low of the bar, depending if it is an engulfing up or down bar. Diagram shows an engulfing down bar and horizontal line at low (orange line).
4. Having completed steps 1 to 3 move to the H4 timeframe (attachment diagram H4 TF).
5. On the H4 timeframe wait for a bar to close below the horizontal line drawn in step 3 and place a Pending Sell Stop at this point. (Opposite for engulfing up bar).
6. Set a Stop Loss about 5 pips above the previous swing high (or below the swing low if an engulfing up bar).
7. Ideally set a Take Profit at 2 times the SL value in pips (or at least 1:1). Example shown SL=48 pips therefore TP=96 pips.
8. If you are feeling confident set a second pending order with the same SL and move to Break even when the other orders TP is hit and let it run! (attachment diagram H4 Let it run)

There will, of course, be times when this does not work for various market reasons but backtesting the major pairs seems to have a good strike rate and some nice pips. Enjoy.

AndyG

I don't understand this part:

1. On the H4 timeframe wait for a bar to close below the horizontal line drawn in step 3 and place a Pending Sell Stop at this point. (Opposite for engulfing up bar).

If the bar had already reached the point, how do you place a pending order for this same point?

Hello billbss, thanks for your post.

I maybe didn't explain too well - the arrow in point 5 above may be slightly misleading. In the example given, after the H4 bar closes below the horizontal orange line it retraces so we can place a sell stop order at the opening level of the new bar. It may be that the next candle just continues on down in which case a market sell order would be ok, but I think from observation, there is usually a bit of retrace before continuation. Hope this helps.

AndyG

Thanks Andy.

That's what I thought but wanted to make sure. We need a retrace.

billbss, well yeah if you want to set a pending sell then you need a slight retrace but if you are happy with a market sell and some drawdown then that ok too.
AndyG

I like it Andy but why mark the open/close if you only use the high/low for the trade?

Thanks pasopvirpot.

The grey rectangle is not completely necessary but I use it for reference when I switch to the H4 i.e. so its clear what period I am looking at. This was probably a hangover from backtesting that I just carried on with. Not essential but gives clarity.
AndyG

I thought engulfing bars had to engulf at least 1 candle? Engulf, outside bar?

Hi Andy,
Intresting, but i feel engulfing bar should have compltely engulfed the earlier candles high and low, or is it something different, please advise.

Thanks,

Hello Rtm, call them what you will - as I said in post 1 "For the purposes of this method an engulfing bar is one where the open and close engulf the open and close of the previous bar."
Cheers
AndyG

Hello aailuck, please see post 10 to Rtm.
AndyG

Interesting start Andy...

at what point does the signal become invalidated for you?

You have a daily engulf, how long do you look for the h4 signal? or what other factors are you considering important?

Hey 60minuteman, nice of you to stop by and comment - I appreciate it from someone of your experience and success. Your threads and videos have been partly the reason for this method for which I thank you, however I could never really get the hang of setting the S&R for targets etc. Also the time frames of 4hr and 15m did not suit me.

As far as your questions go, these are some points that I need to firm up on and would be glad of any help you would be kind enough to give. Having done a bit of backtesting on various pairs it is the case that the signals can stay valid for quite some time but I would suggest that if a signal is given in the other direction the original should be invalid. Targets are still a "work in progress" but I like to look for at least 1:1 if the market gives it with interest in perhaps weekly and monthly S&R.

Any pointers from you gladly accepted.

Cheers

AndyG

Well without hijacking your thread completely I would say the key elements are:

1. Don't even entertain the idea of 1/1... it may give periods of success but long term if you want to grow an account and really make some money, don't accept anything less than 2/1...

This will affect your win rate.... it will... accept it now and move on....

the main reason we do this is not to TP at 2/1,

it is because those wining trades you stay in for that extra H4 bar are where you will get the really big breakout 5R, 10R trades from....

When you backtest psychologically 1/1 or even 2/1 seem very appealing because of the string of winners you will have, but it comes nowhere near comparing with catching 1 or 2 big R trades every week.

You should also notice less pressure to win and much easier to accept small losses...

That's all i'm going to say on your thread Andy, you're on the right tracks here in many ways and if you want to discuss any ideas you can always pm me...

Thanks 60minuteman, I really appreciate your comments and pointers.

I agree with what you say and I suppose its about having the confidence and guts to hold on, something I struggle with, probably down to inexperience but if your trade is based on the proper assumptions and pointing in the right direction the bigger wins should come. Backtesting is ok as far as it goes but forward live trading is a different story.

Thanks again and I may just take you up on that invite to pm you.
Cheers
AndyG

There's sometimes some confusion in threads of this nature, about exactly what "engulfing" means.

The factors that contribute to that seem to include different people's understandings of "bars" and "candles", and exactly what "engulfs" what.

For people looking at candles, strictly speaking the open and close can't both "engulf" those of the previous candle, because forex doesn't gap, and each candle opens at the same level at which its predecessor closed.

Bars and candles obviously present exactly the same information, but with a very different visual emphasis. Those of us who habitually trade price action tend to think that the high and low are far more significant, and we tend to prefer looking at bars, rather than candles. With candles, after all, if the initiation of the measuring-periods is at all different, all the opens and closes are going to be in completely different places, and systems based on those will have completely different trades and outcomes. (I don't suggest that that invalidates them in any way, of course - but it's self-evidently true). The highs and lows on the chart, however, will be the same. Which, again, is why some of us trust bars rather more than candles. Especially those of us (meaning me) who like breakout trades and aren't keen on indicators: we feel that highs and lows signify so much more than opens and closes.

I often trade from bars whose high and low engulf those of the previous bar. I don't trade from bars/candles whose open and/or close engulf those of the previous one (but I watch with interest while others do, especially 60 Minute Man ).

Wishing you very well with the thread, and watching with interest. Thanks for starting it.

To set the Rectangle, to properly cover the day in question, you must edit the time settings and check that the High and Low are also correct

When you set the time properly, that is from 00:00 to 00:00, on the Day chart, the bars covered will show appropriately in the lower time frames

Best and easy to see on these charts, same day as the example in post # 1

Regards, E.

There is always some confusion, especially as you say when the bar's open is the same as the previous bar's close.
Maybe it would be best to describe it as
A bullish bar following a bearish bar - close is higher than the previous bar's open
or
A bearish bar following a bullish bar - close is lower than the previous bar's open

Of course, this may not strictly apply to a Monday bar, when there may be an opening gap

Hang on, in post#1 you are drawing your rectangle from the open and close.
Now you are using the high and low???

This price action method does have merits; in fact when you add a trend filter, perhaps Weekly EMA, and then watch for and enter a trade on retracement, you have the equivalent of a method that sells for thousands on the internet.

So there, just saved you $2,000, just pay AndyG from your winnings and he will pass on to me

Seriously, though, the retracement thing does work, if you can watch price action, and your break out doesn't seem to be taking off, watch what happens at the 50% point, which will be very close to that days' Pivot by the way.

If the trend is strong, and it is not a reversal day, it usually turns around here.

Another thing not mentioned is TOD = Time Of Day. Often the price will drift, in this case, back up, during the Asian session, then when Europe rolls around again, the main trend continues.

And last thing, the EUR-USD seriously is not a good example of this strategy at the present time; sure there are some pips to be had but by no one definition is this pair trending.

Hope that helps, E.