Strategy Overview
Sequence Engulfing is a price-action strategy. A configurable run of same-colour candles prepares a setup. An opposite-colour candle must then confirm the move beyond the selected threshold before a long or short signal is created.
Long Setup Example
How the setup works
- A selected number of red candles prepares a possible long setup; green candles prepare a possible short setup.
- The next qualifying candle must have the opposite colour and confirm beyond the selected Extreme or Open threshold.
- A qualifying signal enters at the confirming candle close. The long and short rules are symmetric.
Research this strategy
Prime Quant Research lets you study this systematic trading strategy using historical data with Backtesting, Parameter Sweeps, and Walk-forward validation.
Strategy Overview
Long Setup Example
Long Setup Example
Long Setup Example
How the setup works
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1
Price first moves outside a band
First, look for a candle to close above the upper band or below the lower band. This starts the setup, but no trade is taken yet.
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2
Look for price to cross back over the band
For a short setup, the next condition is a later candle closing at or below the upper band. For a long setup, it is a later candle closing at or above the lower band.
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3
Check the candle colour
Next, check the colour of the candle that crosses back over the band. For a short setup, the candle must be red. For a long setup, it must be green. If the colour does not match the setup, no trade is taken.
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4
Enter at the confirming candle close
When price has crossed back over the band and the candle colour confirms the direction, enter the trade at that candle's close.
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5
Manage the open trade
Once the trade is open, first check for a signal in the opposite direction. If there is no opposite signal, check the stop loss and then the target. An opposite signal can close the current trade and open a new trade in the other direction on the same candle.
Short Setup Example
The example below shows how the same rules form a short setup.
Short example
Price first closes above the upper band. A later red candle crosses back below the upper band and confirms a short entry at its close.
Short Setup Example
The example below shows how the same rules form a short setup.
Short example
At the selected Entry Time, red candles are in the majority. The trade is entered short at the closing price of the candle at that time.
No majority: If neither colour has a majority, no trade is taken. For example, Green, Green, Red, Red produces no majority and no trade. Even values such as 4, 6, and 8 Pattern Candles are valid. With 4 candles, at least 3 must have the same effective colour to create a majority.
Short Setup Example
The example below shows how the same rules form a short setup.
Short example
Three green candles form the sequence. The next red candle closes below the required level, confirming a short entry at its close.
Setup Examples & Notes
Setup review notes
Use setup examples to compare clean entries, short-side reversals, and failed follow-through cases before running a test.
Strategy Parameters
- Bollinger Length
- Sets how many recent candles are used to calculate the Bollinger Bands. A shorter length reacts more quickly to recent price changes, while a longer length uses more price history.
- Deviation Multiplier
- Controls how far the upper and lower bands are placed from the basis. A smaller multiplier creates narrower bands, while a larger multiplier creates wider bands.
- Basis MA Type
- Selects the moving-average method used to calculate the basis of the Bollinger Bands: SMA, EMA, or WMA.
- Stop Loss
- Sets how far the stop is placed from the entry price, measured as a percentage.
- Target
- Sets how far the profit target is placed from the entry price, measured as a percentage.
Strategy Parameters
- Entry Time
- Sets the exact time at which the setup is triggered. The trade is entered at the closing price of the candle at that selected time.
- Pattern Candles
- Sets how many recent candles are used to compare the candle colours before entry. The colour with the clear majority decides whether the trade is long or short. For example, with 4 candles, at least 3 must have the same effective colour to create a majority.
- Doji Handling
- Sets how a Doji candle is treated when determining candle colour. A Doji is a candle where the open and close are equal, giving it a zero body. It can be ignored, counted as green, or counted as red. The selected Doji setting is applied before the majority colour is decided.
- Stop Loss
- Sets how far the stop is placed from the entry price, measured as a percentage.
- Holding Duration
- Sets how long the trade remains open after entry if the Stop Loss is not reached first. The duration is entered in minutes. The selected duration must match the dataset timeframe, so it must be at least one candle long and divisible by the candle timeframe.
Strategy Parameters
- Sequence Length
- Sets how many candles of the same colour are required before an opposite-colour confirmation candle can create a setup. For example, a Sequence Length of 3 requires three same-colour candles before the opposite-colour candle is checked.
- Engulfing Rule
- Choose how the confirmation candle is checked. Extreme uses the high or low of the last candle in the sequence. Open uses the open of that last candle.
- Doji in Sequence
- Sets how a Doji candle is treated while building the same-colour sequence. A Doji is a candle where the open and close are equal, giving it a zero body. It can be ignored, counted as green, or counted as red.
- Target
- Sets how far the profit target is placed from the entry price, measured as a percentage.
- Stop Loss
- Sets how far the stop is placed from the entry price, measured as a percentage.
Important Notes / Limits
- Only one position can be open at a time. New signals are not added to an existing position.
- When a position is open, the exit order is: opposite signal first, then Stop Loss, then Target.
Important Notes / Limits
- A trade is taken only when one candle colour has a clear majority. If green and red are tied, no trade is taken.
- Timed Candle Pattern does not use a profit Target. The trade exits through the Stop Loss or when the selected Holding Duration is completed.
- Holding Duration must be at least the dataset timeframe, divisible by that timeframe, and no longer than 1,440 minutes.
Important Notes / Limits
- A valid opposite signal reverses the open trade. The current trade is closed and a new trade is opened in the opposite direction at the same confirming candle close.
- Only one position can be open at a time. Same-direction signals are ignored while a trade in that direction is already open.
- When a position is open, the exit order is: opposite signal first, then Stop Loss, then Target.
Research Options
Research Options
Research Options
Practical Tip
Shorter timeframes, shorter Bollinger Lengths, and smaller Deviation Multipliers will generally make setups appear more often. Longer timeframes, longer Lengths, and larger Deviation Multipliers usually make the strategy more selective.
Try different settings, timeframes, and datasets to see how the setup frequency changes across different market conditions.
Practical Tip
A shorter Pattern Candles setting uses fewer recent candles to decide the trade direction, while a larger setting looks at a longer candle sequence. Holding Duration controls how long the trade stays open if the Stop Loss is not reached first.
Try different Entry Times, Pattern Candles, Holding Durations, and datasets to see how the strategy behaves across different parts of the trading session.
Practical Tip
A shorter sequence can produce setups more often because fewer matching candles are needed before confirmation. A longer sequence waits for more candles of the same colour, so setups may appear less often.
Try different Sequence Lengths, Engulfing Rules, timeframes, and datasets to see how often setups appear under different market conditions.
Learn More
For detailed guidance on the research methods:
Learn More
For detailed guidance on the research methods:
Learn More
For detailed guidance on the research methods: