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The Engulfing Bar Breakout Trap In Combination With The Bollinger Bands As A Confluent Factor

Lesson 52 Module 4

Trading with confluence is very important, this trading concept is what makes a difference between success or failure of a trade. Those traders who can be  called consistently profitable have found a way to identify and harness the power of confluence in a way that puts the odds in their favor.

 

The ability to put the odds in your favor is what trading is all about. Figure out a way to do this over and over again and you’ll be well on your way to becoming profitable. This is where the combination of various confluence factors comes into play.

 

Trading the engulfing bar breakout trap in combination with the Bollinger bands is a magic strategy that will make you a lot of money because you will combine banks and financial institutions with the confirmation of one of the most widely used technical indicators.

 

Using the Bollinger bands as a confluent factor is a simple strategy, we only use the default settings, and we pay more attention to the upper and lower bands, because we know that when the market reaches one of these bands, it is either oversold or overbought market.

 

This is only the first information that we get, but this is not quite enough for us, because we need to see that the engulfing bar false breakout happened also at the upper or the lower band, look at the chart  below:

engulfing-bar-with-bollinger-band

As you can see in the EUR USD daily chart, the market was ranging, and formed two engulfing bar false breakout setups.

The first engulfing bar breakout trap occurred at the resistance level, and it was confirmed by another false breakout of the upper Bollinger band.

 

The second engulfing bar breakout trap formed at the support level, and it was confirmed by another false breakout of the lower Bollinger band.

 So, here we have the false breakout of the engulfing bar which is a bank trap that happened at the support and the resistance level, and as a confluent information that confirm our analysis, we have the false breakout of the upper and lower Bollinger bands, which means that technically, the traps happened in an overbought and an oversold sold area which are considered to be hot points in the market.

 Before you look for confluent factors, you should first make sure that the following key elements are presents in your charts:

Ranging market 

False breakout of Support or resistance level

An engulfing bar pattern

When all elements are on your chart, then you can use the Bollinger band to see if banks and financial institution traps happened at the bands, let me show an example below:

trading-with-bollinger-bands

As you can see in the M30 EUR GBP chart, the market is raging, this is the first element that we should look for. Because we know that banks and financial institutions set their traps either in the accumulation phase or the distribution phase. We don’t care about the phase, because in both the market trades between horizontal support and resistance.

 -The second element is the false breakout of the support level. This false breakout is a bank trap that was set to deceive amateurs and take their money.

 -The third element is the engulfing bar pattern which is considered to be a good signal to enter the market, because the formation of this setup indicates that buyers engulfed sellers, in other words, buyers took control from sellers immediately after the false breakout trap.

 

-The fourth element which is the most important is the risk-to-reward ratio. And as you can see, this trade provides us with at least 2:1 risk-to-reward ratio.

 So right now we have all key elements to enter this trade, but if you feel still confused and you are not quite sure of what will happen, let’s see what the Bollinger band says, look at the chart below:

trading-with-the-market

As you can see in the same chart, the Bollinger band confirmed our analysis, look at the false breakout that happened at the lower band.

 The false breakout of the lower band indicates that the market is technically oversold and the trap that happened in this hot area should be taken into consideration.

So now we have another factor of confluence that confirms our trade. All we have to do is to place a buy order at the close of the engulfing bar pattern, and a stop loss below it. The profit target is obviously at the next resistance level. Look at what happened next.

trading-with-bollinger

 

As you see, the market goes up as it was predicted because all the odds were in our favor, this is how we use the Bollinger band as a confluent factor to confirm our trades. Let me give you another example  below:

trading-with-bollinger-bands

This is the GBP CHF M15 minute chart, as you can see the market is in an accumulation phase, the false breakout trap occurred at the support level which is an obvious entry point, but as you can see the risk- to-reward ratio is not quite enough. So what can we do in this situation?

 

As I teached you in the previous lesson about the engulfing bar entry, you can use the 50 % engulfing bar entry when you see that the risk-to-reward ratio doesn’t represent at least 1:2. I don’t recommend you to use it to maximize your profit, but you can do it only when you have all the criteria to enter a trade but the risk-to-reward ratio is less than 1:2. See the chart below:

trading-with-the-bollinger-bands

As you can see in the same chart, by using the 50% entry, we get at least 1:2.5 risk-to-reward ratio, but we risk to miss this trade, because we don’t really know if the market will retrace to test the halfway of the candle or not. You should be ready to miss the trade in case the market goes up immediately after the closing of the engulfing bar, because there is no certainty in trading. 

 

Don’t get pissed off if the market didn’t retrace to test the 50% and then go in your favor, because what matters is not to win this trade, but to be winner in the long term by respecting the risk-to-reward ratio.

 

Now let’s see if the Bollinger band that we use as a factor of confluence confirm our entry or not, see the chart below:

bollinger-band-trading

As you can see, the false breakout was also at the lower Bollinger band which is considered to be a dynamic support level. So, technically the trap occurred in an oversold area which represents an important factor of confluence that confirms our entry.

So now we can take our trade with more confidence because we know that we respect all the rules and if the market goes in our favor, we will make money trading the right way. Let me show you  what happened next:

trading-indicator

As you can see in the chart above, the market retraced to test the halfway of the candle and then went to the profit target. Sometimes the market will leave without you, but when the engulfing candle is big, the market retracts to test the 50% most of the time.

 This is how we trade the engulfing bar false breakout trap in combination with the Bollinger band.

The concepts are simple, but you should make more efforts on your part to master this strategy. You can stop reading right now, and open your charts to seek the same examples, this way will allow you to train your eyes on spotting high probability engulfing bar false breakout traps on your charts.

Pen