An engulfing candle is a significant pattern in technical analysis used to identify potential trend reversals in financial markets, particularly in stock trading and forex. This candlestick pattern consists of two candles and is recognized for its ability to signal a shift in market sentiment.

The pattern occurs when a smaller candle, often representing a period of indecision or consolidation, is completely overshadowed by a larger candle in the subsequent period. There are two types of engulfing candles: bullish engulfing and bearish engulfing.

A bullish engulfing candle forms when the second candle, usually larger and with a higher closing price, completely engulfs the previous bearish candle. This suggests a potential reversal from a downtrend to an uptrend, indicating that buyers are gaining control.

Conversely, a bearish engulfing candle occurs when a larger bearish candle fully engulfs the preceding bullish candle. This signals a possible reversal from an uptrend to a downtrend, indicating that sellers are taking charge.

Traders often use engulfing candle patterns in conjunction with other technical indicators to make more informed decisions about market entry or exit points, providing valuable insights into potential changes in market dynamics.