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Engulfing candle stop: under the body or the whole range? A 12 pip candle worked out

A bullish engulfing candle forms on EURUSD M5: open 1.0853, high 1.0862, low 1.0850, close 1.0861. The range is 12 pips and the body is 8. You buy at the close, 1.0861, and the question is which low to hide the stop under.

Under the body means 1.0853 minus half a pip, 1.08525, so the stop is 8.5 pips from entry. Under the whole range means 1.0850 minus half a pip, 1.08495, which is 11.5 pips from entry.

Risking $100 on a $10,000 account, the body stop gives 100 / (8.5 x 10) = 1.17 lots and the range stop gives 100 / (11.5 x 10) = 0.86 lots. Say the target is the next level 15 pips up, at 1.0876. That's 1.76R from the body stop and 1.30R from the range stop. Break-even win rates before costs are 1 / 2.76 = 36.2% and 1 / 2.30 = 43.4%. With a 0.8 pip spread each adds roughly three points.

So the narrow stop looks 7 points cheaper. But the body stop sits only half a pip below the candle's open at 1.0853, and a retest of an engulfing candle's open is a very ordinary thing for price to do. If your setup says the retest is allowed, the range stop matches the idea. If the setup says the candle must hold, the body stop is the honest one, and you accept being stopped by anything that revisits it.

Pick the stop that the idea itself needs, then see what the break-even rate says about the target.

A third choice is the midpoint of the candle's body, which is 1.0857 here. A stop at 1.08565 is 4.5 pips from entry, giving 2.2 lots at $100 risk, and a 15 pip target is 3.3R. Break-even win rate before costs is 1 / 4.33 = 23.1%. It looks wonderful, which is the warning. At 2.2 lots, the 0.8 pip spread costs $17.60, which is 0.18R, so the real break-even rate is about 27%, and a stop that close to the entry is inside the normal retest zone. A big reward to risk ratio from a tight stop is only good if the stop is survivable.

Whichever stop you choose, sizing from it keeps the dollar risk constant, so the stop choice affects three other things. First, the number of trades that survive the first few minutes. Second, how many pips of profit you need before moving the stop to break-even. Third, how much slippage matters, since 1 pip of slip is 12% of an 8.5 pip risk and 8.7% of an 11.5 pip risk. These are small differences individually. Together they explain why two traders using the same engulfing signal have different results with the same win rate.

You can settle the body-or-range question for your own pair with 30 engulfing candles from M5 history. For each, record the entry at the close, the lowest price in the next 12 bars, and where that low sits against the body low and the range low. Then count three groups: price never went below the body low, went below the body low but not the range low, and went below the range low. If the middle group is 10 of 30, then the body stop would have taken 10 extra stop-outs on trades that range-stop traders held. What those held trades did next is the number that matters.

A related point is that the pattern's size changes with the volatility of the hour. A 12 pip candle in a quiet hour is large, but the same 12 pip candle during the London open is ordinary. If you set the stop from the candle, the dollar risk is the same, but the lot size swings from 0.86 to 2 or more as candle ranges shrink, and the target stays tied to levels, not to the candle. A cap on lot size or a minimum stop of say 6 pips, written beforehand, stops a tiny candle from producing an oversized position that happens to meet a 1% rule on paper.