Engulfing Bar Strategy | JadeCap

This one pattern helped me make over $4 million in the last three years and even break the world-record payout at Apex. Let me show you exactly how it works:

 

» For a true engulfing pattern, the new candle must break the previous candle’s low and the previous candle’s high. «

 

What Is an Engulfing Bar? We’re simply looking for two candles—along with proper context—to define the pattern: Imagine we have a down candle with its open, high, low, and close. The next candle is what determines whether we have an engulfing bar. For a true engulfing pattern, the new candle must break the previous candle’s low and the previous candle’s high. It completely “engulfs” the previous range (aka Outside Bar/Candle).

 

So picture the first down candle closing. The next candle runs below that low, takes it out, reverses, pushes above the prior high, and closes somewhere near the top half of its range. That two-candle formation gives us a tremendous amount of information about where the next candle—or even the next several candles—may go.

 

Understanding the Context: Inside a higher-timeframe candle (4-Hour or daily), there are dozens of smaller candles—1-minute, 5-minute, 15-minute—that form all the micro-structure. Within that lower-timeframe structure, the engulfing pattern represents:

 

▪ A Liquidity Raid

▪ A Shift in Market Structure

▪ A Smart Money Reversal

▪ A Market Maker Buy Model (for bullish engulfing)

So although it's only two candles on a higher timeframe, those two candles often reflect an entire lower-timeframe reversal model.

The key is the closure. Many beginners think a candle will close as an engulfing bar, only for it to close weakly or back inside the prior range. That invalidates the pattern. A proper engulfing bar should close with a strong, decisive body—typically in the upper 50% for bullish setups, or the lower 50% for bearish setups.

Bullish vs. Bearish Examples: For a bullish engulfing bar, the second candle runs below the prior low, reverses, and breaks the prior high (Outside Candle). For a bearish engulfing bar, it runs above the prior high, reverses, and breaks the prior low. Both reflect a higher-timeframe representation of a lower-timeframe Market Maker Model.

 

» Every setup has a failure rate. «

 

What Most Traders Don’t Realize: Every setup—Engulfing Bars, Fair Value Gaps (FVGs), Market Maker Models—has a failure rate. I learned this the hard way after blowing dozens of accounts trying to trade every engulfing bar I saw. Two things matter:

1. Every setup fails sometimes. If you backtest these candles, you'll see some of them lose. Your job is not to find the magical 100%-win-rate setup. It doesn’t exist. You may find these patterns work 60% of the time. Your winners must be managed well enough to pay for the losers.
2. Location matters. A lot. When I was new, I took every engulfing bar. That was a huge mistake.
   ▪ If you're bullish, you want the engulfing bar to form at a swing low, ideally after taking out sell-side liquidity.
   ▪ If it forms after taking out buy-side liquidity—at a high—it's often a sign of exhaustion and more likely to fail.
   ▪ The reverse is true for bearish setups.

Avoid:

▪ Bullish engulfing bars printed at or after taking out buy-side liquidity.

▪ Bearish engulfing bars printed at or after taking out sell-side liquidity.

 

These filters alone drastically improve your win rate.

 

The $98,000 Example: Let’s walk through the trade from last week. We printed a large bullish engulfing candle immediately after FOMC. The candle swept sell-side liquidity, reversed, broke the prior high, and closed strongly—exactly what we want at a swing low. We were also inside a daily Fair Value Gap (FVG), adding even more confluence.

 

Bullish Engulfing Bar Setup in the NZDUSD (4-Hour candles). 

My first target was buy-side liquidity above the highs. Since the market was near all-time highs, I was also looking for a move toward the psychological 25,000 level. As soon as the futures market reopened at 6 p.m., I entered with a 20-lot position. My stop was below the weekly open. I was looking for roughly a 1:3 risk-to-reward.

 

On the lower timeframes, the price action continued to confirm the model—bullish FVGs forming on the way up, continuation structure holding. Meanwhile, bearish engulfing candles printed at swing lows failed, exactly like we want to see.

 

I showed the live account login on the video: real balance, real fills, floating around $93,000 at one point. But the dollar amount doesn’t matter. If your account is small, making $200 or $400 using the same rules is identical—it’s just a matter of position size. Years ago, I was risking $500–$1,000. As my net worth grew, I increased my risk proportionally. Eventually, price hit my target and I closed the trade for roughly $98,000.

 

Final Thoughts: Engulfing bars are easy to spot—but only powerful when combined with

 

    ▪ Proper context

    ▪ Liquidity understanding

    ▪ Market structure

    ▪ Higher-timeframe narrative

    ▪ Disciplined trade management

 

Your homework is to backtest and forward-test these exact setups: where the engulfing bar forms, where the liquidity sits, where your stop should go, and how to trail it as price moves in your favor. Scaling in, adjusting stops, and managing the trade all revolve around that one pattern.

With this engulfing bar strategy and the rules I just shared, you now have everything you need to start identifying high-probability opportunities. Remember: profitable trading isn’t about talent or luck—it’s about discipline, patience, and following your rules every single time.

Reference:

JadeCap (Sep 27, 2025) - I made $98,741 Trading This Simple Candlestick Strategy. (video)

 

Stop using the wrong timeframes. Use H4 and M15.

 

See also:

JadeCap (July 18, 2025) - Simple ICT Day Trading Strategy That Works Every Day.
JadeCap (July 17, 2025) - ICT Intraday Liquidity & Volatility Trading Playbook.

Michael J. Huddleston (2022) - Trading the Outside Day Candle. (video) 

Michael J. Huddleston (2022) - The Two Fair Value Gaps: Profiting from Imbalance. (video) 

Larry Williams (1998) - Outside Bar Trading Setups. 

Buy and Sell Signals | Larry Williams

If I observe prices in a strong downtrend, followed by a period of sideways movement before another decline, only to immediately return to the previous trading range, that's a buy signal.

 

Buy Signal: Dump, dump, (dump), go sideways and pump a bit, one more small dump, then the pump.

Sell Signal: Pump, pump, (pump), go sideways and drop a bit, one more small pump, then the dump.

 

Why? Because, during the sideways range, accumulation was taking place. The breakdown likely liquidated many long positions, and professional money will often buy in that area.

 

 

If the price quickly returns to the range, it confirms that they’ve been buying, and that's when I want to enter a long position in the market.

Quoted from:
Larry Williams (2016) - Buy Signal. (video)

 

See also:

Larry Williams (2011) - Long-Term Secrets to Short-Term Trading.

Outside Bar Trading Setups | Larry Williams

In his book, 'Long-Term Secrets to Short-Term Trading', 2nd Edition, Chapter 7, Larry Williams provides price action patterns to profit. Larry Williams says that there are two daily bars that most confuse retail traders, the Inside Bar and the Outside Bar: 

 

» What the public 'sees' on their charts as being negative is most often apt to be positive for short-term market moves and vice versa. A case in point is an outside day with a down close. The day's high is greater than the previous day's high and the low is lower than the previous day's low and the close is below the previous day's low. This looks bad, like the sky is indeed falling in. In fact, the books I have read say this is an excellent sell signal, that such a wild swing is a sign of a market reversal in favor of the direction of the close, in this case down. [..] The problem is these outside day patterns do not occur as often as we would like! The next time you see an outside day with a down close lower than the previous day, don't get scared, get ready to buy ! « 

After an Outside Day with a Down Close lower than the previous day, BUY!
After an Outside Day with an Up Close higher than the previous day, SELL!

An Outside Bar is a bar that broke the previous bar's high and the previous bar's low. For related trading setups Larry Williams specifically looked for outside bars on the daily time frame that closed below the previous daily low or closed above the previous daily high. After such a bar prints, a reversal in the price action should be expected. According to Larry Williams, Outside Bars only appear 7% of the time on the daily time frame.

This is what an outside bar with a down close looks like:

According to Larry Williams, this will be a buy set up in theory. Here we can see it looks bearish to the public eye because the close is below the low. This indeed can be a turning point. Enter long on the next daily open. The stop loss is below the low of the outside bar.
 
This is what an outside bar with an up close looks like:

 

This is a sell set up. It looks bullish to the public eye because the close is above the high. This indeed can be a turning point. Enter short on the next daily open. The stop loss is above the high of the outside bar. 

 
Targets should be logically related to buy side/sell side liquidity levels (previous highs and lows), Imbalances/Fair Value Gaps and/or 50% swing retracement levels. Consider only setups offering risk-to-reward ratios ≥ 1:2.

 

Don't expect every single Outside Bar setup to be a winner. Other setups and filters can nullify or optimize it (e.g. Oops Pattern, Smash Day, Day of the Week, trading in Premium or Discount, actual outside bar small range or large range, swing high or swing low recently broken, occurrence in 3 Day Cycle and 3 Week Cycle, close above/below 9-Day EMA, etc.). The video below shows Outside Bar Trading Setups on timeframes also smaller than the daily.

Reference:
Larry Williams (1998) - Long-Term Secrets to Short-Term Trading, 2nd Edition.

D'onte Goodridge (February 2, 2023) - Outside Bar Model by Larry Williams. (video)

D'onte Goodridge (March 15, 2023) - Turning Points on the Higher Time Frame. (video)

Ali Casey (2022) - Larry Williams' Outside Day Strategy. (video)

Broadening Formations & The Third Universal Truth | Robert F. Smith

The Third Universal Truth is this: There is only ONE price pattern. Everything trades in a continuous series of broadening formations because there are only three scenarios that can possibly play out from one bar to the next. Therefore only THREE types of bars exist: the Outside Bar, the Inside Bar, and the Directional Bar. It is impossible for price to do anything else. Range expansion on both sides occurs ONLY because Outside Bars exist. 

Broadening Formation on quarterly, monthly, weekly, and daily Apple Inc (AAPL) charts.

Inside Bar = 1 | Directional Bar = 2 | Outside Bar = 3

Almost every book on technical analysis claims that the broadening formation is extremely rare, when the truth is it is one of the only things that can possibly happen. A broadening formation is a pattern where ranges continue to expand on both sides, thus an outside bar is a broadening formation when you shorten the time frame of the chart. It must be because by definition the range is expanding on both sides. While many traders will talk about stocks making higher lows and lower highs, one thing is that securities will always trade in a series of higher highs and lower lows. Even if a stock is in a steady uptrend from, say, $80 to $100, somewhere along the way that stock will make a series of higher highs and lower lows on some time frame. 

 

 Basic Diagram of the Broadening Formation.

While this may seem irrational, it helps to analyze this statement from the perspective of supply and demand. When a stock reaches a new high, it means that a new group of buyers have been identified above the previous high. Eventually, that buying pressure exhausts, and the stock retreats. This new group of buyers becomes trapped, and this will create pressure to the downside, either on a short-term time frame or a long-term time frame. Inevitably, the stock will eventually get pushed towards a previous low, whether it's a recent low on a 15 minute chart or a major inflection point on a monthly chart. As the stock pushes towards this low, those buyers at highs will succumb to the selling pressure, drive the stock to a new low that is bought up by the sideline traders or natural buyers, and the stock will resume higher until it reaches the next new high. This series repeats itself, which creates a formation that can be fit into a triangle.

 

 Nasdaq (Daily Bars)

Inside Bar = 1 | Directional Bar = 2 | Outside Bar = 3

Every chart shows but Broadening Formations, nested series of Range Contractions and Range Expansions

on yearly, quarterly, monthly, weekly, daily and lower time frame charts. Full Time Frame Continuity occurs when all time frames point in the same direction, providing a more reliable assessment of the market's direction.

Nasdaq (4 Hour Bars)

Inside Bar = 1 | Directional Bar = 2 | Outside Bar = 3

 

Broadening Formations = ICT Seek & Destroy Profile

 

How to find a Broadening Formation?

1. Identify an Outside Bar on a Higher Time Frame.
2. Remember an Outside Bar takes out BOTH sides of the previous bar's range. This is how we gauge the potential magnitude of an expected move.
3. An Outside Bar = A Broadening Formation on a Lower Time Frame chart. This is a FACT. Ignore previous Technical Analysis textbooks.
4. Locate the High of the Outside Bar and DRAW BACK to a previous Higher High (HH Point #1 to #2). Generally try and use an extended line type drawing tool on your charting software as this will extend the line forward.
5. Locate the Low of the Outside Bar and DRAW BACK to a previous Lower Low (LL Point #1 to #2).
6. View the same chart on a Lower Time frame and watch the magic happen. Now you have a Broadening Formation.
7. Note depending on your charting software you may have to adjust your lines at key high and low points when switching between different time frame charts this is normal and due to the difference in candlesticks between timeframes.

Reference:

Robert F. Smith (2020) - What Do We Know to Be True About Price Action?

Robert F. Smith (2020) - The STRAT Method of Trading.

Robert F. Smith (2021) - The Broadening Formation Phenomenon A-Z (videos).

Robert F. Smith (2022-2023) - YouTube Channel.

Michael J. Huddleston (2017) - ICT Weekly Seek & Destroy Manipulation Profile.

 Darya Filipenka (2023) - ICT Optimal Trade Entry (OTE).

Darya Filipenka (2023) - ICT Draw on Liquidity.    

Darya Filipenka (2023) - ICT Advanced Market Structure.

Darya Filipenka (2023) - ICT Market Maker Buy Model and Sell Model (MMXM).

 

 Robert Franklin 'Rob' Smith (1964-2023).
Life and death of a sporty American reborn Christian trader. R.I.P.

 

#TheStrat Setups with Entry, Stop and Target Levels. 

#TheStrat Risk/Reward Ratios are mostly sub-optimal.

ICT Optimal Trade Entry (OTE) strategies do improve poor #TheStrat RR-Ratios significantly.

 

28 #TheStrat Setups = 14 bullish + 14 bearish. 

 Inside Bar = 1 | Directional Bar = 2 | Outside Bar = 3