What is Bearish Engulfing pattern?

Bearish Engulfing pattern.

The bearish engulfing pattern is a popular candlestick reversal pattern that typically signals a shift in momentum from an uptrend to a downtrend. It is the opposite of the bullish engulfing pattern, and it is often used by traders to predict a potential reversal of the market price to the downside.

Bearish Engulfing Pattern Overview:

  • Two Candles:

    1. First candle: A small bullish (green) candle, meaning the price closed higher than it opened.

    2. Second candle: A larger bearish (red) candle, meaning the price closed lower than it opened, and this candle completely engulfs the body of the first (bullish) candle.

  • The key feature is that the second candle (bearish) fully engulfs the body of the first candle (bullish) — this means that the open-to-close range of the second candle is larger and opposite in direction to the first.

Example.1:



Example.2:





Example.3:





How to Identify a Bearish Engulfing Pattern:

  1. First Candle: A small bullish (green) candlestick, indicating that the market has been moving upwards or is in an uptrend.

  2. Second Candle: A larger bearish (red) candle that opens above the previous candle’s close and closes below the previous candle’s open, completely engulfing the body of the first candle.

Key Characteristics:

  • Size of Candles: The second candle (bearish) should ideally be larger than the first candle. A larger bearish candle shows stronger selling pressure.

  • Location: The pattern is more significant when it forms after an uptrend, indicating a potential shift to a downtrend.

  • Confirmation: Some traders look for further confirmation before acting, such as waiting for the next candlestick to continue down or for additional bearish signals.

Bearish Engulfing in Context:

  • Trend Reversal: It typically appears after a strong uptrend, signaling a reversal. The large bearish candle suggests that sellers have taken control of the market.

  • Market Sentiment: This pattern suggests a shift in market sentiment from bullish to bearish.

  • Volume: The pattern is more powerful when the bearish candle has higher volume, as it indicates stronger selling pressure.

Example:

Imagine a stock is in an uptrend, and we observe the following:

  1. The first candlestick is a small bullish candle (closing higher than it opened).

  2. The second candlestick is a large bearish candle (closing lower than it opened), and it completely engulfs the body of the first bullish candle.

This setup suggests that the buying pressure has faded, and sellers have now taken control, which could indicate the beginning of a downtrend.

How Traders Use It:

  • Enter Short Positions: After identifying the pattern, traders may consider entering a short position (sell) to take advantage of the expected downward movement.

  • Stop Loss: A stop-loss is often placed above the high of the bearish engulfing candle to protect against a potential false breakout or reversal.

  • Target Price: Traders may target the next significant support level or a previous low as a price target for the short trade.

Strength of the Bearish Engulfing Pattern:

  • The pattern is more reliable if it forms after a strong uptrend and if the bearish candle is large and clear.

  • It is more significant if it occurs near resistance levels or after a period of consolidation.

  • Volume can increase the pattern's strength. A bearish engulfing pattern with strong volume can indicate that the sellers are more powerful than the buyers.

Bearish Engulfing vs. Bullish Engulfing:

  • Bearish Engulfing: A small bullish candle followed by a large bearish candle, suggesting a potential reversal from an uptrend to a downtrend.

  • Bullish Engulfing: The opposite of the bearish engulfing pattern. It involves a small bearish candle followed by a larger bullish candle, signaling a potential reversal from a downtrend to an uptrend.

Bearish Engulfing Pattern in Action:

  • After the bullish trend, the bearish engulfing pattern appears as a sign that the buyers are losing momentum and the sellers are starting to dominate. The second large red (bearish) candle fully engulfs the first green (bullish) candle, showing that the sellers are taking control.


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