Bearish Engulfing Pattern: Definition and Example of How To Use

Bearish Engulfing Pattern: Definition and Example of How To Use

What is a bearish engulfing pattern?

One technical chart pattern that indicates future price drops is the bearish engulfing pattern. One bullish candlestick (often white or green) is followed by a much larger bearish candlestick (typically black or red) that completely covers, or “engulfs,” the first bullish candlestick. A significant pattern since it indicates that sellers have gained control of the market and are actively driving prices down (down candle) more so than purchasers were able to drive prices up (up candle)

What Does the Bearish Engulfing Pattern Tell You?

• Occasionally, bullish price swings will finish with a bearish engulfing pattern. The initial upward-trending candle gets “engulfed” by a more significant second candle that signals a change to lower pricing. When the engulfing candle’s initial price is much above the closure of the first candle, and when the engulfing candle’s closing price is far below the opening of the first candle, the pattern has increased dependability. A down candle has greater power if it is substantially more significant than the up candle instead of just slightly more prominent.
• When a clear upward trend precedes the pattern, it tends to be more trustworthy. Many engulfing patterns will appear if the price action is choppy or ranging, but there will be no significant price shifts because of the choppy or ranging nature of the general price trend.
• Traders often wait for the second candle to close in the pattern before moving on and then acting again on the next candle. Following the appearance of a bearish engulfing pattern, traders may choose to liquidate long positions or adopt short positions.
• New short positions may be entered with a stop loss above the two-bar pattern’s high.
• Bearish engulfing patterns are used by astute traders who keep the big picture in mind. For example, if the upswing is strong, going short may not be the best move. In some instances, the appearance of a bearish engulfing pattern is not enough to stop the upward momentum. But if the broader trend is down and the price has just had a pullback to the upside, a bearish engulfing pattern may provide a favorable chance to short the market.

Example of How to Use a Bearish Engulfing Pattern

• Three bearish engulfing formations can be seen in the above forex chart sample. Within a broader downtrend, the initial engulfing pattern forms an upswing. As expected, the pricing trend continues downward.
• The following two enveloping patterns are less noteworthy in the larger view. First, with limited upward price movement before the formation of patterns, the forex pair’s trading range is narrowing, suggesting turbulent trading. A reversal pattern is only handy if there is little to reverse. Engulfing patterns are unreliable trading indications in range-bound and volatile markets.

The Difference Between a Bearish Engulfing Pattern and a Bullish Engulfing Pattern

Contrasting styles, these two. When prices drop, then recover, that’s a bullish engulfing pattern. In this two-candle design, the first candle is a downward-sloping one. The second candle is an upright candle of much greater size, and its actual body completely engulfs the first candle, which is shaped like an upside-down triangle.

Limitations of Using a Bearish Engulfing Pattern

• After a sharp uptrend, engulfing patterns may be exceptionally informative since they reveal the market’s change in momentum from the upside to the downside. However, the engulfing pattern is a typical indicator. Thus, its importance is reduced if the price movement is turbulent, even if the price increases overall.
• The second, or enveloping, candle may be relatively large. If a trader decides to trade the pattern, this might result in a considerable stop loss. The potential gain from the deal isn’t worth the probable loss.
• With engulfing patterns, it might be hard to gauge the potential profit since candlesticks don’t provide a price goal. To choose a price objectively or determine when to exit a winning trade, traders must resort to other approaches, such as indicators or trend analysis.