What is Bearish Engulfing Pattern: A Beginners 101 Guide

In technical analysis, the candlestick patterns are widely used to predict market movements. Amongst all patterns, the Bearish Engulfing Pattern is a reliable signal for potential trend reversals, allowing traders to make informed decisions while anticipating a shift from bullish to bearish market conditions. 

In this blog, we’ve mentioned what a bearish engulfing pattern is in a way that every beginner can understand. Let’s begin!

Understanding the Bearish Engulfing Pattern 

The Bearish Engulfing Pattern refers to two-candlestick chart patterns in technical analysis, signalling a potential reversal from an uptrend to a downtrend. It occurs when a small bullish (green or white) candlestick is immediately followed by a larger bearish (red or black) candlestick that completely engulfs the previous day’s body. 

The bearish pattern indicates that sellers have overtaken buyers, suggesting a potential decline in price. Simply put, it is a warning to buyers that price growth may be exhausted and soon reverse. 

How to Trade Using the Bearish Engulfing Pattern?

The Bearish Engulfing Pattern is generally considered a sell signal. While identifying this pattern, you can enter short positions, betting that the price may decline. You should enter right below the low of the second bearish candlestick.

Below, we’ve mentioned some effective strategies to ensure profits while trading during Bearish Engulfing Patterns. 

• Enter Short Positions: While identifying a bearish engulfing pattern, you can enter short positions right at the bottom of the low of the second bearish candlestick.

• Set Stop-Loss Orders: You can set a stop-loss right above the high of the bearish engulfing candle to limit your potential losses in case the trade is not in your favour.

• Profit Targets: Determine your profit targets as per previous price actions, support/resistance levels, or risk-reward ratios. Ensure monitoring of the trade continually; market conditions tend to change at any instant. 

• Confirmation with Other Indicators: You must use the Bearish Engulfing Pattern in conjunction with other technical indicators, like Volume, RSI (Relative Strength Index), Fibonacci Retracement, and Moving Average Convergence Divergence (MACD) to confirm the reversal signals. This way, you can increase your profit chances.  

• Position Size: You should adjust the size of your position based on your risk tolerance and stop loss distance. 

In addition, you may use Screener (a software enabling investors to filter and sort through a large number of stocks or securities based on specific criteria, price, market cap, and volume) to confirm the pattern and increase your profit chances. 

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Pros and Cons of Using the Engulfing Pattern

Here, we’ve mentioned the pros and cons of the Engulfing Pattern. 

Pros	Cons
It indicates a potential trend reversal from an upward trend to a downtrend, allowing you to make informed decisions.	This pattern can even generate false signals, particularly in smaller time frames, due to market noise.
It may be an early warning for a downtrend, suggesting buyers adjust their positions before a drastic price decline.	It is often required to confirm the pattern with other indicators or price actions to increase reliability.
The pattern is versatile and can be used in varied market conditions, including stocks, commodities, and currencies.	The success or precision rate of this pattern may be less effective during highly volatile markets.
It can be a reliable indicator of market sentiments and potential price declines, particularly when combined with other indicators.	You need to apply proper risk management techniques, such as stop-loss orders, to mitigate potential losses.

Conclusion

In summary, the Bearish Engulfing Pattern is a valuable tool for traders looking to identify potential reversals from bullish to bearish trends. While it is a reliable indicator, you should also use other technical analysis methods to confirm the trends and navigate the market with greater confidence.