What is the Bearish Engulfing Candlestick Pattern?

Understanding Bearish Engulfing Candlestick Pattern

The bearish engulfing pattern that has become one of the clearest indicators for price drop action is a Technical Analysis Chart Pattern. It is represented by a green candlestick with a subsequent red candlestick, which overshadows the green counterpart in size, almost engulfing it.

A bearish engulfing pattern indicates that the market's sellers are no longer outnumbering purchasers and that the trading patterns are shifting. The Bearish Engulfing Pattern, named by the Japanese after a solar eclipse, may appear after a sustained market uptrend and may be a sign that the bullish market is about to turn bearish.

A bearish engulfing pattern can occur anywhere, but it's more important when it's at its peak or when it's placed just after a consistent upward trend, given that the candlesticks are relatively larger than the rest of the candlesticks around them. While doing stock trading using a stock trading account, this pattern proves to be a help for traders.

How to identify Bearish Engulfing Candlestick?

A green (bullish) candlestick followed by a red (bearish) candlestick that exceeds or engulfs it in size indicates a bearish engulfing pattern. For a pattern to be considered a Bearish Engulfing Pattern, the initial price of the bearish candlestick must be greater than or equal to the closing price of the bullish candlestick.

The bullish candlestick's initial price from the previous day (or period) is higher than the bearish candlestick's ending price. The original body of the bullish candlestick must, therefore, completely encompass the real body of the bearish candlestick. The importance of the market signal sent by the Bearish Engulfing pattern increases with the size of the disparity between the two.

How to Trade using the Bearing Engulfing Pattern?

There is a certain amount of anxiety or risk associated with the Bearish Engulfing candlestick pattern. Market reversals do occur, and a Bearish Engulfing pattern is a highly valuable indicator of a likely shift in the market direction. This is because it is naturally a means of trading despite the trend and can be a helpful tool.

The simplest strategy to trade a bearish candlestick pattern would be to recognize it after a sustained rising trend. But this might be a dangerous spot if you decide to take a short position. Wait until the following day, and if the market keeps falling, you may then prepare and take your position.

For those who want to hold back on risks, you can wait for the gap to open when the bearish engulfing pattern is detected. A downward gap occurs if the opening price for a business day is below the closing price on that previous trading day. In this case, a bearish engulfing candlestick is observed after the day.

Make sure you set a stop loss above the high wick of the second candle in the bearish engulfing candlestick pattern if you want to reduce your losses further if your forecast is wrong. Online trading account holders use this pattern very often in stock trading.

Example of Bearish Engulfing Candlestick Pattern

A simple example of a bearish engulfing candlestick pattern is presented here:

Day 1: A small green bullish candlestick with short body forms indicates buying pressure. The closing price is the same as the initial price.

Day 2: A larger red bearish candlestick forms, engulfing the green candle of the previous day. The opening price shall be greater than Day 1's closing price, and the final price of Day 2 shall be less than that of Day 1.

This bearish engulfing pattern suggests a shift in sentiment from bullish to bearish, indicating potential weakness in the current uptrend. This pattern can be interpreted as a signal that traders are considering selling or placing bearish bets, but it is important to use it for more reliable trading decisions in conjunction with other analysis tools.

Limitations of Bearish Engulfing Pattern

The limitations of the bearish engulfing pattern are as follows.

1. An engulfing trend is most helpful when there's a clear upward price movement, and it illustrates the shift in momentum to the downside. The significance of the engulfing pattern is diminished when the price action is erratic, even if the price is rising overall because it is a fairly common signal.

2. There may also be a huge engulfing or second candle. If the trader opts for a trade pattern, that could leave him with a very high stop loss. The potential profit from the trade does not justify the risk.

3. In engulfing patterns, as candlesticks do not set a price objective, it may also be hard to determine the potential reward. Instead, for determining a price target or when to exit a profitable business, traders will need to use other methods such as indicators or trend analysis.

Conclusion

The bearish engulfing pattern, when used in conjunction with additional technical analysis tools and followed by a trading day that confirms a trend shift, can be a highly helpful tool for projecting market direction. This pattern is simple to spot since it follows a prolonged rising trend and engulfs or completely eclipses the previous day's bullish candlesticks. Open trading account with BlinkX Finance to get more technical guidance, comprehensive reports on selected stocks and markets, and better control of your financial journey.