Bearish engulfing patterns happen typically at the top of uptrends. They are a two candlestick pattern setup; first candle is a small bullish candle followed by a second larger bearish candle that completely engulfs the first candle. Look for price to fail second candle and hold to confirm bearish continuation.
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What Are Bearish Engulfing Patterns?
A bearish engulfing pattern consists of two candlesticks that form near resistance levels where the second bearish candle engulfs the smaller first bullish candle. Typically, when the second smaller candle engulfs the first, price fails and causes a bearish reversal.
The bearish engulfing pattern signals the possible end of a bullish trend. Confirmation is needed for this pattern to set up and break.
Made up of two candlesticks; first candle is a small bullish candlestick with small wicks. While the second candlestick is a bearish one that engulfs the small bullish one.
The name of the chart pattern implies the what the future may bring. A bearish trend engulfing the previous bullish one to reverse it.
This pattern typically occurs at the top of a bullish trend. Read this signal as a peak or a slowing down in it is move up. Often good to consider the prices of the stock that occurred before the bearish engulfing candle as well as after it.
Bullish momentum is coming to an end when bearish engulfing candles form; especially when second candles price opens higher than the first candles price. The more the second candle falls down, the more significant the downtrend signal is. This move should be lower than the first candle.
Main Points You Need to Know:
- Can happen on any time frame, but more significant if it occurs after the stock in is a trend up.
- The body of the stick, not the wicks is what matters
- The body of the declining candle must engulf the candle before it that was a green candle
- Ideally, both candles are big candles compared to the other candles around them and both have significant volume.
- The bigger the candles the more solid the setup
- If the market is choppy, it is not as strong a signal.
- Look for trending markets to get better trade signals from this candlestick pattern
Technicals
When they occur at the top of an uptrend; one of the most important factors of a reversal. Bearish engulfing candles can happen anywhere on a chart but the most powerful reversal signal is when it forms at the top on a trend or a peak. Pair this with other technical analysis for even more information; such as previous support/resistance areas, moving averages, and current volume. Adding in all that information will help create a stronger game plan.
The pattern has formed at a key resistance level that the bulls cannot break. The bears do not want price to climb anymore so they step in. The highs of the bearish engulfing candle should be the highs of the pattern.
The next candle after the bearish engulfing pattern close lower than its predecessors. That is a pretty significant signal that the trend reversal is taking place. It should start making lower lows.
How to Trade Bearish Engulfing Patterns
- Watch for 1st bullish candlestick to form
- Next, watch for 2nd larger candlestick to engulf 1st smaller bullish candle
- Then, watch for 3rd candlestick to fall below 2nd
- Traders take a short position once price breaks below the 2nd candlestick
- Place stop above the top of the 2nd candle
- Some traders take a long position once price breaks above 2nd candle
- Then place stop below the 2nd candle
- Pair this strategy with the ABCD pattern
