When it comes to technical analysis in trading, the ability to read candlestick patterns is among any traders’ essential arsenal. Candlestick patterns provide a clue or hint of the future price movement. Combined with the right indicators, tools, and analysis, candlestick patterns can become really reliable. One candlestick pattern which is very common and can show up on any kind of market trend is the Bearish Engulfing Pattern. In this write-up, we’ll discuss the Bearish Engulfing Pattern and what would be the ideal strategy when dealing with this kind of pattern in trading.
(NOTE: Before we continue, we have to give a disclaimer that the trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. CFDs are complicated instruments that are never guaranteed to provide you supplemental earnings. In fact, Around 68% of all retail investors experienced a loss while trading CFDs. Make sure to keep this in mind before attempting to use the eToro platform yourself. All the information found on this website is not official trading advice and all practices shown are referenced for the use of the Demo account only.)
What is a Bearish Engulfing Pattern?
The Bearish Engulfing Pattern as its name suggests is a bearish candlestick pattern that signals trend reversal toward a downtrend. This means that an upward trend is about to go to a downtrend. it is composed of two candles which include a bullish candle for the first candle, and a bearish candle for the second candle. The first bullish candle should have a smaller body compared to the second candle, and the second candle should have a body (with tail) that is much bigger than the first – in other words, the second candle should “engulf” the first candle (as shown in the image below).
For a pattern to be classified as a Bearish Engulfing Pattern, the bearish candle should have an opening price that is higher than the closing price of the bullish candle. In addition, the bearish candle should also have a closing price that is lower than the opening price of the bullish candle. The tails of the bearish candle should also be longer than the tails of the bullish candle.
While this pattern usually develops at the end of a long bullish trend, it can also form within swings or short uptrends.
As an ideal stop loss for short trades when dealing with the Bearish Engulfing Pattern, a trader can establish a stop loss just at the end of the upper wick or tail. As an ideal sell position for long trades to avoid losses from an assumed trend reversal, a trader can sell positions at the level of the closing price of the second candle.
The counterpart of the Bearish Engulfing Pattern is the Bullish Engulfing Pattern which has the same conditions however tailored toward a bullish trend.
Trading with the Bearish Engulfing Pattern on eToro
Now, when trying to identify a Bearish Engulfing Pattern on a chart, always look to the peaks of a trend or at the end of a bullish trend. As soon as a possible Bearish Engulfing Pattern is located, make sure that the left side before the pattern shows considerable buying pressure. Afterwhich, determine if the body of the bearish second candle engulfs the body of the bullish first candle. To ensure that the body of the second candle engulfs the body of the first candle, simply draw horizontal trendlines at the ends of the tail or body of the second candle (as shown from the previous image).
To have a clearer idea of how the Bearish Engulfing Pattern is implemented on actual trade, let’s take a few examples from eToro.
On this first example with the asset – GOLD, we can see three Bearish Engulfing Pattern formations (shown by red arrows). The first condition about the location of the pattern is confirmed along with the bullish trend from its left side. Finally, each second candle from all occurrences has significant dimensions compared to the first candles.
As mentioned earlier, the ideal exit points for short trades would be at the tip of the upper tail, while the ideal exit point for long trades to avoid losses would be at the closing price level of the bearish second candle.
Another example for Bearish Engulfing Pattern formation is on Google (GOOG) which in this case is found on an uptrend – particularly within the swings. The patterns formed at the peak of every swing as shown by the red arrows. Also, the left side before the pattern shows strength from buyers.
On this particular example, a trader would have won multiple trades with the Bearish Engulfing Pattern as long as the right exit or stop-loss points are made. In addition, we can also see that the pattern is highly effective when trading with swings, tranches or when compounding.
Our Final Thoughts
The Bearish Engulfing Pattern can occur in all types of trends whether uptrend, downtrend, or sideways. If it is not visible on a daily range, it can be found within smaller range intervals such as hourly or minute-range. Also, Bearish Engulfing Pattern candles with substantial bodies present a more significant trend reversal than Bearish Engulfing Pattern candles having smaller bodies or dimensions.
Ultimately, what really distinguishes a pattern to be a Bearish Engulfing Pattern is the difference in the body of the first and second candle and the color of the candle. The second candle should be bearish or color red and should completely overwhelm or engulf the first candle.
The ideal entry and exit points would be based on the dimensions of the second candle.
While trading with the Bearish Engulfing Pattern seems like a fail-proof strategy, it actually takes practice and experience to profit from trades using this pattern. With an eToro virtual account, you can trade the Bearish Engulfing Pattern on a real-time trade without having to spend anything. Simply create your own eToro account and check out the virtual portfolio to trade with virtual funds.
Good luck and enjoy!
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