There are many patterns in this form of charting, and this post will explain one of them. Below is a chart of the XAU. In the blue circle is an example of a bearish engulfing pattern.
The bearish engulfing pattern is a two candle formation. The first candle comes after a long uptrend, and can be any colour. The length of the candle should be relatively long. The second candle is more important. It must open higher than the previous day's candle. This shows that the bulls are in control. Then what must happen is that it then should close beneath the low of the previous day. In this way, the second candle completely wraps around the first candle. One other note, the second candle should close near the low of the day. This is referred to as a shaved bottom, and when a candle has no upper shadow, it is said to have a shaved head.
As I mentioned before, reading charts is like looking at a battle between the bulls and bears. If you look at the two candles in the above chart that are in the blue circle, you can see that previously the trend was up, which means that the bulls are firmly in control. On the second candle line, the bulls open the price well above the previous day's close. However, the bears come out, and take control away from the bulls, and close the price down hard. This represents a major victory for the bears. The above chart shows one of the most textbook like examples of this pattern I have ever seen. This was the main piece of evidence that made me go short that day.
