Trading the engulfing bar pattern with moving averages provide a very profitable trading strategy, however, the lack of knowledge about using the moving average can damage dramatically your trading account.

Traders use moving averages in different ways:

-As a trend following tool to identify the direction of the trend, so they buy the market when prices are above 200 simple moving average. And they sell the market when it is below the 200 simple moving average.

-To determine whether the market is overbought or oversold we just watch how prices interact with the moving averages, for example, in an uptrend, if prices move far from the moving averages, this is an indication that the market is overbought.

-To predict the trend, change by using the crossover strategy, if the moving average crosses over another, it is a signal of a trend reversal.

As any trading system, the moving averages have disadvantages; this is why you have to know how to use it successfully under the right market conditions.

This trading technical tool doesn’t apply to all markets, don’t never try to use it in range bound or untradeable markets.

Because you will get lot of false signals, and you will definitively blow up your trading account.

To the best of my knowledge, using the moving average as a dynamic support and resistance in trending markets, in combination with an engulfing bar pattern signal is the perfect way to make money in the market.

The strategy is very simple, we will use the 21 and the 8-simple moving averages in the daily and 4-hour time frames, we will define a clear bullish or bearish market and we simply buy when price pullbacks to the moving average and an engulfing bar pattern forms.

See the illustration below:

Conversely, if the moving average is trending down, it shows that the market is in a downtrend, we sell when price retrace to the moving average.

The screenshot below shows how prices interact with the moving average as dynamic resistance level, and how the engulfing bar pattern represented a high probability setup.