What is Bearish Engulfing Pattern?

Bearish engulfing is a two-candlestick technical pattern that shows market potential. If you have started learning candlestick patterns, a bearish engulfing candle pattern is one that you cannot ignore. This pattern basically indicates downward price movement, and it is one of the easiest patterns for beginners to spot a bearish trend.

With 2 consecutive candles, this pattern comes with a smaller bullish candle with a larger bearish candle that covers the first. This blog explains what a bearish engulfing pattern is and its effectiveness in trading.

What Does a Bearish Engulfing Pattern Mean?

A bearish engulfing pattern occurs at the end of an uptrend and signals a trend reversal. It indicates that the sellers will outnumber the buyers and keep the price low. As mentioned earlier, 2 candles form this. When a down or red candle follows and engulfs an up or green candle, this pattern occurs.

The first candle in this bearish engulfing candle pattern is green, indicating the buyers had enough for the session, and the price shows a bullish momentum.

The second candle makes the bearish engulfing pattern evident. This bearish or red candle opens at a price above the previous day’s closing. This shows that buyers are still strong at the beginning of the second day. However, the price closed below the opening mark.

The closing price on the second day is also lower than the opening price on the first day. This means that sellers have significantly dominated buyers and dragged the price down on day 2.

Significance of Bearish Engulfing Pattern

A bearish engulfing pattern serves as an early indicator of a shift from a bullish to a bearish trend. This pattern shows a sharp change in market sentiment, which suggests sellers have taken greater control over the market.

This reversal pattern is important since it indicates an upcoming change in price movements, as the previously dominating force started losing momentum.

Effectiveness of Bearish Engulfing Pattern

A bearish engulfing candle pattern may have some limitations. You can see this pattern on the chart for the same rationale, but it is not applicable practically. It can be more effective when there is a huge gap between the opening of a bearish candle and the closing of a bullish candle. However, this pattern may not be effective practically if there is a small gap between the closing of the preceding candle and the opening of the engulfing candle.

A bearish engulfing pattern is more dependable when the closing of the bearish candle is lower than the opening of the bullish candle. You should also note that a bearish engulfing candlestick pattern may not be effective in volatile markets.

How to Recognise a Bearish Engulfing Pattern?

Recognising a bearish candle covering a bullish candle is not enough to assume that it is signalling a trend reversal. You need to look for the other confirmation signals to identify a strong bearish engulfing pattern:

1. Trading Volume

   The trading volume on the first day of the bearish engulfing pattern will be moderate to high. On the second day, if the selling volume goes higher, it means a bearish engulfing pattern is indicating the reversal is getting stronger.

2. Prevailing Trend

   Before an upcoming bearish engulfing pattern appears, the prices will move upward, which signals a prevailing uptrend.

3. Support Level Breakouts

   You can also recognise a bearish engulfing pattern by checking if the price breaks out below the prevailing support line. This shows that the selling pressure is higher compared to the buying pressure.

4. Next-Day Confirmation

   You can also wait for a day to spot the reversal. If the candle of the second day goes bearish, it means sellers are continuously dominating the market. This indicates a persistent downtrend.

Advantages of Bearish Engulfing Pattern

1. Simplicity

   A bearish engulfing candlestick pattern is easy to identify. Even beginners to technical analysis can find it simple to identify.

2. Early Warning Signal

   It is an early indicator of a potential trend reversal, which allows you to adjust your position.

3. Versatility

   You can use a bearish engulfing pattern in various time frames and markets. You can use it in stocks, commodities, futures, and even in forex.

4. Reliable

   The reliability of this pattern is highly enhanced when used with other technical indicators like Moving Average Convergence Divergence (MACD) and Relative Strength Index (RSI).

5. Risk Management

   Since it provides clear levels for setting stop-loss orders, a bearish engulfing pattern can also help to manage risks.

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Disadvantages of Bearish Engulfing Pattern

1. Inaccuracy

   This pattern should clearly show the change towards a downward trend. However, this pattern could be a false indication.

2. Highly Dependent

   The effectiveness of a bearish engulfing pattern highly depends on the market conditions, the assets, and their position in broader price trends.

3. Emotional Pitfalls

   A bearish engulfing pattern can also trigger emotional responses like overexcitement or fear. If not managed well, these may result in poor trading decisions.

4. Potential Delay

   If this pattern is a good signal, it can ask for additional confirmation. This could cause a delay in taking advantage of it.

Similarities Between Candlestick Charts and Bar Charts

Both bar charts and candlestick charts are used by traders to see the price changes over a certain period. Traders know very well the key information about the open, close, high, and low prices for a selected time.

The main similarity of both is that they have vertical lines, which show the price range, with horizontal notches or candle shapes. While the primary difference lies in the presentation, bar charts use single bars and candlestick charts use candles to indicate bullish or bearish price trends.

Both charts enable you to identify trends, signals, and reversals.

How to Trade With a Bearish Engulfing Pattern?

A bearish engulfing pattern serves as a sell signal, which traders can use to take short positions once confirmed. Each candlestick shows the price activity of the full day on a daily price chart.

An increase in the volume during the engulfing candle’s formation can reinforce a strong downward move. In this situation, an aggressive trader may act swiftly by entering trades at the end. Additional confirmation, including price breaking an upward trendline, lends more weight to the signal.

How to Use a Bearish Engulfing Pattern?

Traders in the market often interpret a bearish engulfing pattern as a signal to start short positions. A stop-loss is placed just above the height of the engulfed bullish candle.  Depending on your risk-reward ratio or close to significant support zones, profit goals are established.

For instance, take a look at a daily candlestick chart, where each candle shows the price change for the day. Significant volume increases during the engulfing candle’s formation may be a sign of a more robust downward trend.

In these situations, you can decide to sell your holdings when the engulfing candle appears at the day’s end.

Differences Between a Bearish Engulfing Pattern and a Bullish Engulfing Pattern

When you have understood the bearish engulfing pattern, you must know how it differs from a bullish engulfing pattern:

Final Thought

Understanding a bearish engulfing pattern helps you to make a strategy for a market downtrend. A bearish engulfing pattern consists of two candles. A smaller bullish candle is engulfed by a larger bearish candle.

However, always be cautious when making impulsive purchase decisions and take guidance from experts. If you want proper guidance about investing and trading, use the PL Capital application and get a seasoned professional to manage your money.

Frequently Asked Questions

1. To what extent is bearish engulfing accurate?

A bearish engulfing pattern is accurate when it is used along with trendline breaks, volume analysis, and technical indicators like RSI or MACD. It is especially effective when it is seen near resistance levels or after an extended rally.

2. How can one spot fake bearish engulfing?

To identify a fake bearish engulfing pattern, you must look at other technical indicators and pay attention to the market. Fake patterns can mislead traders, especially in sideways or low-volume markets.

3. What is the bearish engulfing success rate?

The success rate of a bearish engulfing pattern is 79%. 79% of the time, it had worked well as a bearish reversal.

4. Does day trading benefit from bearish engulfing?

Yes, day traders can take advantage of a bearish engulfing pattern by using it as an indication to enter a short position, or as a signal to exit a long one.