In technical analysis, a bearish engulfing pattern is a chart pattern that consists of a small green candlestick followed by a large red candlestick that eclipses or “engulfs” the small green one. This is pattern is considered a bearish reversal signal, that is, it indicates that the price is likely to change its trend from bullish to bearish.
How can you identify a Bearish Engulfing Pattern?
There are a few key things to look for when identifying a bearish engulfing pattern:
1. The pattern should form after a period of uptrend.
2. The first candlestick in the pattern should be a bullish (green) candlestick.
3. The second candlestick in the pattern should be a large bearish (red) candlestick that completely engulfs the first candlestick.
4. The bearish candlestick should open above the close of the bullish candle.
5. The bearish candlestick should close lower than the open of the bullish candle.
If you see a pattern that meets these criteria, then it is a bearish engulfing pattern and it is a sign that the market is reversing course and heading lower.
When is this pattern likely to occur?
The bearish engulfing pattern typically occurs after an extended uptrend and is considered a strong signal that the trend is reversing. The pattern can also occur during a downtrend, but is less reliable in this case.
The bearish engulfing pattern is a strong indication that the bulls are losing control and the bears are taking over.
In line with the current trend, the bulls were in charge of the market throughout the first bullish candle. The second candle begins higher than the first, but eventually bears seize control and the price falls so much that it totally engulfs the bullish candle at the close. This may cause fear among the bulls, resulting in a long unwinding rally.
How to trade a bearish engulfing candlestick pattern?
If you want to trade this pattern, there are a few things you should keep in mind. First, this pattern is typically found near resistance levels or at the top of an uptrend. Second, before entering a trade, you should wait for the candlestick pattern to form and confirm.
Here’s a step-by-step guide to trading this pattern:
1. Identify a potential pattern.
2. Wait for the pattern to form and confirm. It’s important to wait for the second candlestick to close before entering a trade.
3. Once the pattern has formed and confirmed, you may enter a short position.
4. Your stop loss can be placed above the high of the pattern. Or it can be a fixed percentage or points based stoploss depending on your research.
5. The target can be the height of the pattern or it can also be a fixed percentage or points based target depending on your research.
To confirm the pattern, traders will often wait for the next candlestick to open below the low of the black candlestick. They may also look for other bearish signals, such as a downward-sloping moving average.
Strategy Example
Strategy Link: https://public.streak.tech/in/pJ49xjI4mr
This strategy takes a sell position when a bearish engulfing pattern is formed and the RSI is higher than 50. RSI higher than 50 tells us that the pattern has formed after an up move in the price. Exit is based on fixed percentage based stoploss and target.
Let’s sum it up
The bearish engulfing pattern is considered a bearish reversal signal, that is, it indicates that the price is likely to change its trend from bullish to bearish. The pattern typically occurs after an extended uptrend and is a strong signal that the trend is reversing. The bulls were in charge of the market throughout the first bullish candle. The second candle begins higher than the first, but eventually bears seize control and the price falls so much that it totally engulfs the bullish candle at the close.
Disclaimer: The information provided is solely for educational purposes and does not constitute a recommendation to buy, sell, or otherwise deal in investments.
