What is Bearish Engulfing Candlestick Pattern? What are its features?

The engulfing candle is a powerful indicator for detecting potential market reversals. So, what precisely is the Bearish Engulfing Candlestick Pattern? We’ll clarify this in the following article.

KEY TAKEAWAY

The Bearish Engulfing pattern, where a large bearish candlestick fully covers a smaller bullish one, signals a likely reversal from an uptrend to a downtrend.
The Bearish Engulfing pattern occurs when a bearish candlestick fully covers a previous bullish or Doji candlestick, with the second candlestick’s opening price being equal to or higher than the first’s closing price, and its closing price lower than the first’s opening price.
While not foolproof, the bearish engulfing pattern can be useful in a trading strategy if confirmed by high volume, used to enter a short position, and managed with a stop loss above the pattern, especially when it appears near support or after a strong uptrend.
The bearish engulfing pattern is a useful tool for predicting market declines, with both advantages and limitations.

WHAT IS THE BEARISH ENGULFING CANDLE PATTERN?

Bearish denotes a market trend with anticipated price declines, while 'Engulfing' refers to a candlestick that completely covers the previous one. As a result, the Bearish Engulfing pattern indicates a high probability of a trend reversal, suggesting that an uptrend is likely to shift to a downward trajectory.

Specifically, this pattern forms when a large bearish candlestick entirely engulfs the body of a smaller bullish candlestick, signaling that selling pressure is surpassing buying pressure.

FEATURES OF THE BEARISH ENGULFING CANDLESTICK PATTERN

The specific structure of the Bearish Engulfing candlestick pattern has the following criteria:

The first candlestick can be a bullish candle or a Doji.
The second candlestick must always be a bearish candle.
The opening price of the second candlestick must be equal to or higher than the closing price of the first candlestick, and its highest price should also be above the closing price of the first candle.
The closing price of the second candlestick must be lower than the opening price of the first candlestick, meaning the lowest price of the second candlestick will also be lower than the opening price of the first candlestick.

The bearish engulfing pattern occurs when the body of the second candlestick fully engulfs the body of the first candlestick.

Many people often mistakenly believe that the Bearish Engulfing pattern means the price range of the first candlestick must be entirely within the price range of the second candlestick, which is not correct

HOW TO TRADE WITH THE BEARISH ENGULFING CANDLESTICK PATTERN

While not foolproof, the bearish engulfing pattern can be a valuable component of a broader trading strategy:

Identification: Look for the Bearish Engulfing pattern during an uptrend, where a large bearish candlestick completely engulfs the body of the previous smaller bullish candlestick. This pattern is identified when the bearish candle’s body fully covers or exceeds the high and low of the preceding bullish candle, indicating a shift in market sentiment.
Confirmation: Seek additional confirmation, such as high trading volume on the bearish candle, to validate the reversal signal.
Entry Point: Consider entering a short position when the next candle opens after the bearish engulfing pattern.
Stop Loss: Place a stop loss above the high of the bearish engulfing candle to manage potential losses.
Volume: Higher trading volume alongside the pattern enhances its reliability.
Position: The pattern’s placement within the trend is important. It is generally more reliable when it appears near a support level or after a strong uptrend.

PROS AND CONS OF THE BEARISH ENGULFING CANDLESTICK PATTERN

The bearish engulfing pattern is a valuable tool in technical analysis for forecasting potential market declines. It offers several advantages but also has limitations:

Advantages:

Provides a clear visual signal of a possible market downturn.
Usable across different time frames.
Easy to spot on charts.

Limitations:

Needs confirmation from other indicators to confirm reliability.
Does not always ensure a price reversal.
Effectiveness can vary based on market conditions.

To enhance the pattern’s effectiveness, traders should combine it with other technical indicators and analysis methods. Understanding these strengths and weaknesses helps traders integrate the bearish engulfing pattern more effectively into their overall trading strategy.

And that concludes the information we’ve gathered. We hope this helps traders better understand the Bearish Engulfing pattern, which provides a clear signal of potential market reversals. However, many traders may not have enough information about this pattern. Therefore, we recommend the Klarda app, which offers continuous and accurate updates to provide the most precise information and aid in making well-informed decisions.