What is the Bearish Engulfing Candlestick Pattern?

The bearish engulfing pattern is a technical analysis chart pattern, recognised as one of the clearest signs of a price cut action signal. It is represented by a green candlestick with a subsequent red candlestick that overshadows the green counterpart in size, practically eclipsing or engulfing it.

Bearish Engulfing is a sign that the buyers are not overpowered by the sellers in the market and the patterns of trading behaviour are undergoing change. Named by the Japanese after a solar eclipse, the Bearish Engulfing Pattern may occur after a continued uprise in the market and maybe an indication of the bullish market turning bearish.

A bearish engulfing pattern may occur anywhere but it gains greater significance if it is at the peak of, or placed just after a consistent upwards rising trend considering the candlesticks are both relatively larger than the other candlesticks surrounding them.

How to identify a Bearish Engulfing Candlestick Pattern?

A Bearish Engulfing pattern can be recognised by a green (bullish) candlestick followed by a red (bearish) candlestick that eclipses or engulfs it in size. For a pattern to qualify as a Bearish Engulfing pattern, the opening price of the bearish candlestick must be equal to or greater than the closing price of the bullish candlestick.

The closing price of the bearish candlestick is lower than the opening price of the bullish candlestick from the previous day (or periods). Hence, the real body of the bearish candlestick must engulf the real body of the bullish candlestick. The greater the difference between the two, the more significant the market indication prompted by the Bearish Engulfing Pattern.

How to trade using Bearish Engulfing Candlestick?

There is a certain element of fear or risk involved in following the Bearish Engulfing candlestick pattern. Since it is inherently a method of trading against the trend and it can be your friend, but market reversals do happen and a Bearish Engulfing pattern is an extremely useful indicator of a potential shift in market direction.

The simplest way to trade using a bearish candlestick pattern would be to identify this pattern after a consistent upward trend. However, this can be a risky place to make your decision on taking a short position. Instead, wait for the consecutive day and if the market continues to fall you can then plan and take your position.

For those who wish to hold back on risks even further, you can wait for a gap to open up after the bearish engulfing pattern is spotted. A downward gap occurs when the opening price for a trading day opens below the closing price for the previous trading day. In this case, after the day the bearish engulfing candlestick is observed. If you wish to further minimise your losses in the case of your prediction being incorrect, make sure you set a stop loss above the high wick of the second candle in the bearish engulfing candlestick pattern.

Conclusion

The Bearish Engulfing candlestick pattern can be a very useful tool in predicting market direction when paired with other technical analysis tools and succeeded by a confirming trend shift trading day. This pattern is easily recognisable as it usually occurs after a consistent uptrend and engulfs or eclipses the bullish candlestick from the previous day. For more technical insights, detailed reports on your selected stocks and markets and greater control and management of your financial journey, open a trading account with IIFL today!

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Frequently Asked Questions Expand All

Advantages:

  • Easy to recognise and interpret
  • Tends to be a relatively accurate market predictor
  • Can be used with other technical analysis tools
  • Can be combined with other technical indicators

Disadvantages

  • The reversal in market trends is not guaranteed
  • May require confirmation of direction before price action is taken.
  • It may not be a very accurate indicator if previous market behaviour isn’t a consistently followed upward trend
  • A large bearish candlestick may push the stop-loss level higher leaving the trader with a larger stop-loss.

In singularity, the Bearing Engulfing Pattern has little to no meaning. It has to be viewed along with the market trend that it has followed. When viewed with market structures of support and resistance, the right Bearish Engulfing pattern can be considered a gold mine. In the right situations and with accurate measures such as the application of other technical analysis tools, Bearish Engulfing can be an extremely predictive, indicative and useful trading strategy.