As I’ve mentioned in previous articles, the engulf is one of the most important pieces of price action that I use for making trading decisions. Whether trading long or short term, an engulf of some kind will be used in the trading analysis.
The daily chart is great for identifying major supply and demand in the market and the recent trade example showed that the engulf of supply on the H1 chart was the signal required for entry at a demand level. The opposite of course is true for trading from a supply level. Whilst I like this type of confirmation on the H1 chart, this may not suit every currency pair out there.
All pairs have their own characteristics so although all price movement will be based on supply and demand on each one, the way price moves to and from the levels may differ.
When price hits supply or demand, the nearest opposing level can be over a 100 pips away. Some pairs will travel 100+ pips, engulf the opposing level and continue on without coming back to the origin of the move. For pairs where this occurs, the H1 engulf confirmation wouldn’t be suitable. We could ignore these pairs and that’s fine or we can adopt another confirmation approach so that we can still benefit from these moves.
The process is very similar to the one previous mentioned but for the type of confirmation.
The chart below is a great example of a quality demand level. Price left a consolidated area in a very strong fashion. A large candle leaving the left shows how great the supply and demand imbalance was. This was marked up on my charts for a while.
Some nice big red candles dropped back into the zone showing that there was nothing significant to stop price moving higher which was another plus for the setup.
Confirmation and Entry
We know that the nearest H1 supply is over a 100 pips from the demand zone. Pairs like the GBPAUD can easily engulf that opposing supply and not look back. An option here is to wait for an engulf of a 15m level and retrace to fresh demand prior to price reaching the H1 supply. The stop stays small and we can still get into the trade with confirmation albeit not the the H1 confirmation.
In this example we have a 15m supply and demand flip zone. The nearest 15m supply is engulfed and demand is formed in it's place right at the same spot as the previous supply. This is where you can enter.
- We can exit all at the H1 supply just in case price is rejected
- We can take partial profits at the H1 supply, move the stop to BE and hold the remainder
- We can hold all till the target
Your exit decision will depend on your trading style and risk tolerance.
Another example occurred on the GBPAUD at the same time. You can see it here below:
I hope you found this useful.