Definition - To start this pattern, traders will see a small white body which then becomes engulfed by a larger black body on the next day. During an uptrend in the market, the shadows aren't always engulfed too but the body will be engulfed completely; for top reversal, this is a key signal.
- On the first day, a white body will appear when the market is experiencing a prevailing uptrend.
- On the second day, a black body will form which will go on to engulf the body seen on the first day.
Patterns and Flexibility
Although the first candlestick length isn't important and it can potentially be a Doji, the second is important and will have to be normal or long. Also, the body tops or bottoms may reach the same level. Regardless of whether they do or not, the black candlestick must be longer than the white candlestick because it will engulf it on the second day.
Behaviour of Trader
When the white body forms on the first day, volume is normally relatively low during the uptrend in the market. On the second day, the market opens at highs which suggests bullish trading but momentum is soon lost and the bears take advantage. Eventually, the selling pressure becomes too much and the market closes lower than the previous day’s open. With this in mind, the uptrend has been damaged and has lost significant strength.
Sell/Stop Loss Levels
For there to be confirmation, the last close will be used as the confirmation level and the prices will have to cross below this level. In terms of the stop loss, this will be the last high. If prices rise following a bearish signal, the stop loss will be triggered if two consecutive days of highs above the stop loss level are seen. Also, assuming that no bullish pattern has been detected.