How to draw bases with Engulfing, Piercing and Harami

patterns
31st March 2014, 01:45 PM
In previous lessons you have learnt about extremes (valleys and peaks) as well as
continuation patterns (CP’s). All these formations have a base or price action in
common. Furthermore it is important not to confuse candlestick patterns with a
continuation pattern. The former is a Japanese price action formation, the latter is an
expression mostly used in this supply and demand strategy. A CP is made of Japanese
candle pattern, if you are using candlestick charts, all formations will actually be
made of them.

First of all, let's first define what a base is but also keep in mind that bases almost
never present themselves as textbook structures, below are features we should be
looking for when trying to locate bases (pauses).

A base consist of:

1. A single 50% candle
2. Up to 6 50% candle’s (not more)
3. A Marubozu candle (very rare formation, a tight base with no wicks or almost
not wicks at all). There are a few different Marubozu candles, the white and
black Marubozu are giant. We only will take into consideration the small
Marubozu type
4. A series of 50% basing candles and non 50% candles
WHAT IS A DISTAL LINE AND A PROXIMAL LINE?
An area of supply or demand is not just a single price/line (like classic
support/resistance), but a zone/area composed of a number of pips. The highest part of
that (rectangle) is the distal line, that is, the highest price in the zone. The lowest part
of that rectangle is the proximal line, which is the lowest and the closest to current
price.
• The closer we are to the a supply area, the better for selling and/or exiting your
long positions
• The closer we are to the a demand area, the better for buying and/or exiting
your short positions
We use these patterns to draw based: engulfing patterns, piercing patterns,
haramis, morning/evening stars and marubozu patterns (read below). High wave
candles, wicky candles, failed ERC candles are not used to draw demand areas. We
need a clear base and pause in the market.

As guideline, the cleaner (not many wicks) a base looks the stronger it is. We want to
see tight price action, with explosive moves. However keep the reality of the markets
in mind – this is more an exception than the rule.

IMPORTANT: There are times when zones will have no basing candle at all or even
an ERC candle. They are not as common but they can still be valid zones nevertheless.
We must read price action and score the zone (consolidation away, 2:1 imbalance
etc), together with a top down analysis in order to evaluate its tradability.
There are unfortunately many different looks and shapes for basing zones. These
looks will vary depending on which markets you are trading. There are differences
between Forex candlesticks patterns and Shares, Equities, Commodities. There are
rules for scoring a base or a CP which is already covered in this lesson. This lesson
will focus on three very well known candlestick patterns which are very common in
supply and demand, those patterns being valleys, peaks and CP patterns.

NOTE: In order for us to draw a base we don't include the highs (wicks) of basing
candles to draw a demand zone or the lows (tails) for a supply zone.

Later on when you have gained enough experience with a lot of screen time you may
decide to draw the level wider if the level is not too wide to have a bigger area to
ensure that you get filled in a trade but for now we have to keep it by the rules laid
out.

I am sure that this website is not the first point you come into contact with trading and
you should have read some books before, You will have noticed that reality never
really keeps lining up with things mentioned in books. Formations and candles that
look so nice and easy to read in books seem completely different on a chart that you
look at every time you open your trading platform. Unfortunately the reality of
markets is that they hardly provide us with the perfect looking candle, formation or
for this matter a base every single time, in fact, they almost never do. There are many
nuances we need to take into account so you better get familiar with this harsh reality.

In order to draw a correct base we first need to learn how to read price action candle
by candle. Luckily there are a few well known candlestick patterns that can
consistently provide high odds trading opportunities but as mentioned before they
come in varying different shapes and sizes.

Find below the most common candlestick patterns we will be using to draw our bases
that are the launching pad for imbalances. These formations are slightly different in
Forex and Stocks, please make sure you read about these formations, google them and
learn their nuances.

A candlestick pattern is useless if its location is not correct, where it happens is

the most important variable.
• Engulfing (two candlesticks formation). Last candle closes below/above
previous candles’s open/close.
• Piercing (two candlesticks formation). We could say the piercing pattern is a
failed Engulfing pattern, price fails to close above/below previous candle's
open close by a few ticks. Bearish piercing is also known as 'dark cloud cover'
• Haramis. (two candlesticks formation). One bullish/bearish candle and then
basing candle
• Spinning tops (more than one candlestick). The candles have a small real
body. The upper and lower shadow are almost equal
• Morning stars (bullish) and Evening stars (bearish). They are both a three
candlestick pattern. Morning stars have a strong bearish ERC candle, then a
small basing candle followed by a bullish ERC candle
• Dojis (single candlestick). Same open and close price
If I had to choose one pattern or candle that has the most significance it would be
the Bullish and Bearish Engulfing patterns, as they are the building blocks of
potential future trend, which you will realize in future lessons.

WATCH THIS VIDEO

This short video shows you a few examples of the most common candlesticks you can
find at imbalances. The video does not discuss the validity of imbalances, it focuses
only on the candlestick formations, nothing else.

IMPORTANT NOTICE: I didn't invent these candlesticks names, they were chosen
a long time ago by those who created and translated these patterns from Japanese, you
can call these patterns haramis, piercing, Tetris, or XYZ, it doesn't really matter. They
are all part of peaks and valleys, swing highs and lows, and pauses (CPs), that's all we
want and need to know. You can call these patterns any name, that will not affect your
trading decisions or understanding of the rules, it's just irrelevant. We just need to
understand what is going on at these swings, their names won't change what is going
or what could possibly happen at those formations. My mother will still be my mother
no matter how I call her, the same applies to these patterns. Do not get obsessed with
these candlestick patterns, you must understand what is going on at
valleys/peaks and CPs, that's all, you must understand the logic behind it. If the
definition of these candlestick patterns slightly differ from what you've learnt or
understood so far, please don't lose any sleep over it, it's just irrelevant. Be flexible
and try to understand the logic and dynamics in these patterns, and what is even more
important, where these candlesticks are happening.

In this lesson we will be focusing on the three most common candle patterns we see
on a base, these are “Engulfing patterns, Piercing patterns and Haramis”
WHAT IS AN ENGULFING PATTERN?
What are engulfing bars? The engulfing bar formation consists of at least two candles,
where the second candle completely engulfs the previous one. Second candle closes
below/above previous candles’s open/close. The signal that the engulfing bar
formation provides is, depending on whether the second bar is bearish or bullish,
either a reversal or a continuation.

Engulfing patterns like all candlestick patterns have many different looks and as
a rule of thumb an engulfing pattern is defined as a candle that closes higher
than the previous candle’s body high (bullish engulf) or lower than the previous
candle’s body low (bearish engulf). If it closes above the high rather than above
the body or below the low rather than below the body, then the engulfing pattern
will even be stronger. The candle that engulfs the prior candle shouldn't be a
50% candle.
• We need at least one candle at the base. If the pattern is located at a higher
Timeframe Supply/Demand Zone makes gives this pattern an even higher
probability of success
• As mentioned above, the ERC candle needs to engulf (close above) the
previous candle's body. The shadows (tails and wicks don’t need to be engulfed
but if that happens as well then even better). Of course the opposite is true for a
bearish engulfing pattern
• More than one candle can be engulfed, however one is the minimum
requirement
• If the proceeding candle has a tight base and is not a 50% candle gives the
pattern more odds
• As highlighted before the engulfing candle should be an ERC candle not a 50%
candle with a solid body
You can find more information on these patterns by getting a copy of one of
the many Steve Nison's books on candlestick patterns. Be careful though, you
can get lost among so many different formations, you might fall into a trap, in a
never-ending loop where obsession will kick in and you will see reversal patterns
everywhere on the charts. We just need a few so don't panic

Engulfing patterns are very common on CP´s (Continuation Patterns), as well as

Marubozu candles (tight non-50% bases with no wicks or almost no wicks)
HOW TO DRAW ENGULFING PATTERNS IN A MECHANICAL WAY
Bullish engulfing pattern taken as an example
1. Locate a basing area where price has created a good imbalance
2. Find a bullish ERC candle that closes above basing bars
3. Bullish candle must close above previous candle's open/close (candle's body)
4. If there are several candles at the base with similar open/closes around the same
price area then the engulf could cover all of them
5. If one of those basing candles is at a different "height", above the previous
basing engulfed candle then skip them and only take into account the ones at
the same level
6. The proximal line will be right at the open/close of the first engulfed candle or
further back in time if there is no candle closing above/below the first engulfed
candle's range
7. The distal line will be at the lowest low of the engulfing pattern (no matter how
many candles there are on the left)
8. The engulfed candle can be either a 50% candle or a non 50% candle
Once you find a basing candle or an engulfing candle closing above/below previous
candle's high/low (depending whether it's demand or supply), we should stop looking
for bases and draw our proximal line. Once price breaks and closes away from the
basing area the new basing candle won't be considered as part of the base since it's at a
different height.
HOW TO USE THE ENGULFING AND PIERCING PATTERNS
1. They are the building blocks of a trend
2. They usually happen at the end of an uptrend/downtrend
3. Engulfs can also be momentum candlestick formations, when that happens a
new trend will be under way
4. Engulfs usually happen at higher timeframe supply and demand zones
5. They can happen at flip zones and previous SR/SD zones that are being
revisited. Engulfs are very common on CPs as well. When we see engulfs at
flip zones, price might be getting ready for a bigger retracement or even a
reversal
6. Don't use engulfs in the middle of nowhere, these patterns are good reversal
candlestick patterns but they need to be at bigger timeframe zones for higher
probability trading
We will look at piercing pattern a bit further below.
PIERCING PATTERNS

These two patterns are similar to the engulfing pattern covered above, the main
difference is that the new candle never closes above/below the previous candle's body.
The dark cloud cover is also a reversal pattern. We could say the piercing pattern is a
failed Engulfing pattern, price fails to close above/below previous candles open close
by a few ticks. Bearish piercing is also known as 'dark cloud cover'

The Piercing Pattern = Dark Cloud Cover

• Piercing pattern = demand reversal pattern
• Dark Cloud Cover = supply reversal pattern
HARAMIS

Haramis are candlestick patterns in which a large candlestick is followed by a smaller

candlestick whose body is located within the vertical range of the larger body.
Haramis can be bullish or bearish and can be a sign of a potential reversal of the
current trend.

Tweaking and extending the proximal/distal lines of a level

There are times when the proximal and distal lines of a base can be tweaked, for
instance when there is a single basing candle (not a wide one) or we have several low
volatility candles at the base without long wicks.

Remember you can be flexible as long as you always keep the same risk, the wider the
level the smaller the lot size, the narrower the bigger the lot size. Experience will tell
you when you should be extending the proximal lines and cover the upper of lower
shadows. As long as you use the same risk per trade it will be fine.

Check out the short 5 minutes video below which explains when it's advisable to add
the wicks to the base of a potential zone Read the full content in this link
22nd April 2016, 07:15 AM
Find below a couple of scenarios on how to draw the based for imbalances based on
the three main candlestick patterns we use. These are just two scenarios. Rember that
basing will happen in many different shapes, you have have up to 6 candles at the
base, shorter/longer wicks, multiple candlestick formations, etc. Each base is different
and as such it should be treated indepenently.
• Engulfing patterns
• Piercing patterns
• Haramis

ENGULFING PATTERN
PIERCING PATTERN
HARAMI

17th January 2017, 10:39 AM

HOW TO DRAW BASES THAT HAVE A SINGLE CANDLE AT THE BASE

When bases are made of a single candle, there are two options we can use to draw
them:

1. Using the closest open/close of the basing candle

2. Using the upper/lower shadows (wicks) of the basing candle. Use this option when
the candle is not very wide and it's not a failed ERC candle

Both options are valid. Price often reacts to the wicks, think of them like a magnetic
field having a range of attraction or an aura.

Be flexible. Experience and screen time will tell you when you can draw one or the
other, or just choose one option and always draw the single candle bases the same
way. Remember that making zones wider will affect the risk reward and profit margin
of any trade you plan at those areas.
This rule also applies to scenarios with more than a single candle at the base, however
candles bodies must be tight and upper/lower shadows should not be very big, always
avoid failed ERC candlles

The minimum RR is measured from the level's proximal line. If the level is made
of a single candle at the base we are allowed to take the upper and lower wicks of the
basing candle, however the 2:1 imbalance will be measured from he highest
open/close at demand, and the lowest open/close at supply. In example below
(AUDUSD W) the RR is measured from proximal line option #1, optionally the level
can be drawn wider covering the upper wick.