What is the swallowing form? How does it predict a trend reversal?

In cryptocurrency trading, technical analysis is one of the important tools traders use to predict market trends and make trading decisions. Among them, the Engulfing Pattern is a common K-line pattern. When it appears on the chart, it is usually considered a signal of a trend reversal. This article will explore in detail what the engulfing pattern is and how it predicts a trend reversal.

Definition of engulfing form

The engulfing form is a reversal form composed of two K-lines. It is divided into two types: bullish engulfing pattern and bearish engulfing pattern.

• Bullish engulfing pattern : appears in a downward trend. The first K-line is a smaller black (or red) K-line, indicating that the seller is dominant. The second K-line immediately following is a larger white (or green) K-line that completely covers the physical part of the previous K-line. This indicates that the buyer's strength suddenly increases and the market may be about to reverse to an upward trend.

• Bearish engulfing pattern : appears in an upward trend. The first K-line is a smaller white (or green) K-line, indicating that the buyer is dominant. The second K-line immediately following is a larger black (or red) K-line that completely covers the physical part of the previous K-line. This indicates that the seller's strength suddenly increases and the market may be about to reverse to a downward trend.

Identification of engulfing form

To identify the engulfing pattern, you need to carefully observe the K-line chart and confirm the following key points:

• Trend confirmation : The effectiveness of the engulfing pattern depends on its appearance in a clear trend. The bullish engulf pattern should appear in the downward trend, while the bearish engulf pattern should appear in the upward trend.

• K-line entity : The entity of the second K-line must completely cover the entity part of the first K-line. The upper and lower shadow lines are not considered, the key lies in the opening and closing prices of the K-line.

• Trading volume : Usually, the trading volume of the second K-line will increase significantly, which further verifies the change in market sentiment.

How does the engulfing pattern indicate a trend reversal

The reason why the engulfing pattern is seen as a signal of a trend reversal is that it reflects a sudden change in market sentiment. Here are the specific mechanisms that predict trend reversal:

• Bullish engulfing pattern : In a downward trend, the market is usually dominated by the seller. When a small black K-line appears, a sharply rising white K-line appears, which indicates that the buyer suddenly pours into the market and overwhelms the seller's strength. This sudden buying pressure is usually a signal at the bottom of the market, indicating that the trend may be about to reverse to rise .

• Bearish engulfing pattern : In an upward trend, the market is usually dominated by the buyer. When a small white K-line appears, a sharply falling black K-line appears, which indicates that the seller suddenly pours into the market and overwhelms the buyer's strength. This sudden selling pressure is usually a signal at the top of the market, indicating that the trend may be about to reverse to decline .

Practical application of engulfing form

In actual trading, traders will combine other technical indicators to verify the signal of the engulfing pattern and improve their reliability. Here are some common auxiliary tools:

• Moving Average : If the engulfing pattern appears near an important moving average, such as the 20-day or 50-day moving average, this may further enhance the credibility of its inversion signal.

• Relative Strength Index (RSI) : If the RSI shows that the market is in an overbought or oversold state, the emergence of the engulfing pattern may be more likely to be a signal of a trend reversal.

• MACD : If the MACD line and the signal line form an intersection, accompanied by the engulfing pattern, this may also enhance the reversal signal.

Things to note when swallowing form

Although the engulfing pattern is a powerful reversal signal, traders should pay attention to the following points when using it:

• Fake signals : Fake signals often appear in the market, and the engulfing pattern is no exception. Traders need to combine other indicators to confirm the validity of the signal.

• Market environment : The effectiveness of the swallowing form will be affected by the overall market environment. In high volatility markets, the signal of the engulfing pattern may be more reliable.

• Risk Management : Even if the engulfing pattern is confirmed, traders should strictly abide by the risk management principles and set stop loss and take-profit levels to control potential losses.

Case analysis of engulfing form

In order to better understand the application of the engulfing pattern in actual trading, we can analyze it through a specific case. Suppose we observe that Bitcoin (BTC) has experienced a downward trend for a period of time and the following K-line pattern appears:

• The first K-line : a small black K-line with a closing price lower than the opening price and a smaller physical part.

• The second K-line : a large white K-line with a closing price higher than the opening price, and the physical part completely covers the physical part of the first K-line.

In this case, we can think of this as a bullish engulfing pattern. Combined with other technical indicators, such as RSI showing the market is oversold, and the MACD line and signal line form a golden cross, we can be more confident that the market may be about to reverse to an upward trend.