The Engulfing Candle & RSI Strategy is a simple yet powerful trading technique that combines a clear price action signal—the engulfing candlestick pattern—with the Relative Strength Index (RSI) to filter high-probability reversal setups. This strategy works especially well at major support and resistance levels and is suitable for forex, indices, and commodities across intraday and swing timeframes.

What Is an Engulfing Candle?

An engulfing candle is a two-candle reversal pattern that signals a potential momentum shift.

Bullish Engulfing:

• Forms after a downtrend
• Second candle is bullish and completely engulfs the previous bearish candle’s body
• Indicates strong buyer interest at lower levels

Bearish Engulfing:

• Forms after an uptrend
• Second candle is bearish and completely engulfs the prior bullish candle’s body
• Indicates seller dominance near highs

The larger and more distinct the engulfing candle, the stronger the reversal signal.

What Is RSI?

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements on a scale of 0 to 100.

Key levels:

• Above 70: Overbought
• Below 30: Oversold
• Crossing above 30 or below 70 can signal early momentum shifts

In this strategy, RSI helps confirm whether the market is extended enough to support a reversal.

Strategy Objective

• Identify potential reversals using engulfing candles at key levels
• Use RSI to validate overbought or oversold conditions
• Trade with greater confidence by filtering weak signals

Indicators and Tools Required

• Candlestick chart
• RSI indicator (14-period standard setting)
• Optional: Horizontal support/resistance or Fibonacci levels

Step-by-Step Strategy Setup

Step 1: Identify Trend and Key Levels
Find a market that is trending or has recently extended into a major support or resistance zone. Draw horizontal levels or use trendlines to mark zones of interest.

Step 2: Spot an Engulfing Candle
Look for a bullish engulfing candle at support, or a bearish engulfing candle at resistance. The second candle must completely engulf the body of the previous candle.

Step 3: Confirm with RSI

• For bullish setups: RSI should be below 40 or crossing up from oversold
• For bearish setups: RSI should be above 60 or crossing down from overbought
• Avoid trades where RSI shows no momentum divergence

Step 4: Entry

• Enter at the close of the engulfing candle or on a slight pullback
• Conservative traders may wait for confirmation from the next candle

Step 5: Stop Loss

• Place below the low of the bullish engulfing candle (long trade)
• Place above the high of the bearish engulfing candle (short trade)

Step 6: Take Profit

• First target: recent swing high/low or next support/resistance
• Alternatively, use a 1:2 risk-to-reward ratio
• Trail stop behind candle lows/highs for extended trends

Example: USD/CHF Daily Bullish Setup

• Market has been in a downtrend, reaching long-term support at 0.9000
• Bullish engulfing candle forms after RSI dips to 28 and crosses above 30
• Entry: Buy at 0.9030
• Stop Loss: 0.8980
• Take Profit: 0.9130 (1:2 risk-reward)

Best Timeframes and Markets

• H1, H4, and Daily charts for forex and commodities
• EUR/USD, GBP/JPY, Gold, NAS100
• Avoid low-volume sessions (e.g. pre-Asian open)

Optimisation Tips

• Look for divergence between RSI and price for extra confluence
• Use engulfing patterns only at major market levels
• Stronger when confirmed by high volume or large candle range
• Avoid setups in tight consolidation or low-volatility markets

Advantages

• Simple and objective entry criteria
• Combines price action with a proven momentum tool
• Works across multiple asset classes and timeframes
• Suitable for reversal and trend continuation setups

Limitations

• Engulfing patterns can occur frequently; confirmation is essential
• RSI may lag in strong trends, so trade location is key
• Not ideal in choppy or sideways markets without clear structure

Conclusion

The Engulfing Candle & RSI Strategy offers traders a clean and disciplined way to enter reversals with confidence. By combining a reliable candlestick pattern with momentum confirmation, it filters out noise and improves decision-making at critical price points.

To master this setup and learn how to apply it within a full trading plan, enrol in our Trading Courses and gain access to professional strategies and expert-led education.