What is a Bearish Engulfing Pattern?
Bearish Engulfing Pattern: Definition, How to Trade it
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If you are a trader, then you have probably come across the term “bearish engulfing pattern.” But what is it, exactly? A bearish engulfing pattern is a candlestick chart pattern that indicates a potential reversal in trend.
It occurs when there is a large red candlestick that “engulfs” the previous green candle. This signals that the bears are taking control of the market and that the bulls are no longer in charge.
Traders often look for bearish engulfing patterns as a signal to enter a short trade. However, it is important to note that this is just one indicator and should not be used alone. It is always best to use a combination of indicators before making any trading decisions.
In a downtrend, a bearish engulfing candle acts as a continuation signal. This is because it indicates that the bears are still in control of the market and that the downtrend is likely to continue.
Every market has bearish and bullish days, so it’s important not to get too caught up in one candle. Instead, focus on the overall trend and use the bearish engulfing candle as a confirmation signal.
If you see a bearish engulfing pattern forming, pay attention to the volume. This is because the volume can often be an indicator of the strength of the move. A bearish or bullish engulfing candle with high volume is more significant than one with low volume.
Bearish Engulfing Pattern vs. Bullish Engulfing Pattern
A bullish engulfing pattern is the opposite of a bearish engulfing pattern. A bullish engulfing pattern occurs when there is a large green candlestick that “engulfs” the previous red candle. This signals that the bulls are taking control of the market and that the bears are no longer in charge.
Just like with bearish engulfing patterns, traders often look for bullish engulfing patterns as a signal to enter a long trade.
How to trade the Bearish Engulfing pattern
Bearish engulfing patterns often occur at the top of an uptrend. So, if you see a bearish engulfing pattern form after an extended uptrend, then this could be a sign that the trend is reversing and that you should take profits off the table.
Alternatively, you could also look to enter a short trade when you see a bearish engulfing pattern form. One way to do this would be to wait for the candlestick that forms the bearish engulfing pattern to close. Once it closes, you could then enter a short trade at the open of the next candlestick. Your stop loss would be placed above the high of the bearish engulfing candlestick.
Of course, like with any trading strategy, there are no guarantees. So, it is always important to use risk management when trading bearish engulfing patterns (or any other pattern for that matter).
Bearish Engulfing Pattern Reliability
The bearish engulfing pattern is a relatively reliable reversal pattern. However, like with any candlestick pattern, there are no guarantees. It is always important to use other indicators (such as support and resistance levels) to confirm the bearish engulfing pattern before taking any trade.
The bearish engulfing pattern should be one layer in your analysis. It is not a standalone trading strategy. However, by spotting this reversal signal you will add an extra tool to your trading arsenal that you can use to make better-informed trading decisions.
Bearish Engulfing Pattern Examples
Now, let’s take a look at some examples of bearish engulfing patterns to make sure the concept is super clear.
In the examples below, our chart colors are different than above. We colored the Up days Blue instead of green, and Down days Pink instead of red.
Look closely at these examples. You can click on the charts below to expand them.
We zoomed out so that you can focus on the overall trend and see more than just the two candlestick combination.