The Bearish engulfing candlestick is a type of multiple candlestick pattern that tends to signal a reversal of the ongoing trend in the market.
This candlestick pattern involves two candles with the latter candle ‘engulfing’ the entire body of the prior candle. The engulfing candlestick can be bullish or bearish based on where it forms in relation to the ongoing trend.
Many traders will use this candlestick pattern to identify price reversals and continuations to support their trading strategies.
What is Bearish Engulfing Pattern?
A bearish engulfing pattern is a technical chart pattern that signals lower prices to come. The pattern consists of an up (white or green) candlestick followed by a large down (black or red) candlestick that eclipses or “engulfs” the smaller up candle. The pattern can be important because it shows sellers have overtaken the buyers and are pushing the price more aggressively down (down candle) than the buyers were able to push it up (up candle).
Formation of Bearish Engulfing Patterns:
A bearish engulfing pattern is the opposite of a bullish engulfing; it comprises a short green candle that is completely covered by the following red candle.
The first candlestick shows that the bulls were in charge of the market, while the second shows that bearish pressure pushed the market price lower. The second period will open higher than the previous day but finish significantly lower.
What do Bearish Engulfing Patterns tell you?
A bearish engulfing pattern tells traders that the market is about to enter a downtrend, following a previous increase in prices. The reversal pattern is a signal that bears have taken over the market and could be about to push the prices down even further – it is often seen as the sign to enter a short position or ‘short-sell’ the market.
The pattern is also a sign for those in a long position to consider closing their trade.
Again, although the wicks are usually not considered a core part of the pattern, they can provide an idea of where to place a stop-loss. For a bearish engulfing pattern, you’d put a stop-loss at the top of the red candle’s wick as this is the highest price the buyers were willing to pay for the asset before the downturn.
Bearish Engulfing Pattern vs. Bullish Engulfing Pattern
These two patterns are opposites. A bullish engulfing pattern occurs after a price moves lower and indicates higher prices to come. The first candle, in the two-candle pattern, is a down candle. The second candle is a larger up candle, with a real body that fully engulfs the smaller down candle.
Below is a summary of the main differences between the bullish and bearish engulfing patterns. Traders should keep these in mind in order to avoid false signals.
Limitations of Using a Bearish Engulfing Pattern
Engulfing patterns are most useful following a clean upward price move as the pattern clearly shows the shift in momentum to the downside. If the price action is choppy, even if the price is rising overall, the significance of the engulfing pattern is diminished since it is a fairly common signal.
The engulfing or second candle may also be huge. This can leave a trader with a very large stop loss if they opt to trade the pattern. The potential reward from the trade may not justify the risk.
Establishing the potential reward can also be difficult with engulfing patterns, as candlesticks don’t provide a price target. Instead, traders will need to use other methods, such as indicators or trend analysis, for selecting a price target or determining when to get out of a profitable trade.
- The Bearish engulfing candlestick involves two candles with the latter candle ‘engulfing’ the entire body of the prior candle.
- A bearish engulfing pattern will be made of a shorter green bar being engulfed by a long red bar. This indicates a bullish trend is coming to an end, ready for a downtrend
- The pattern has far less significance in choppy markets.
- Bearish engulfing candlestick is a lagging indicator, meaning they give the signal to enter a trade after the price movement has occurred.