The trend reversal, or to be precise the exact point when the trend reverses, is the ideal moment to enter the trade. So many traders ask how to recognize it’s coming? There is a candle pattern that forms at the top of the upward trend and it does indicate a potential reversal of the trend. It is called the bearish engulfing candlestick pattern.
The good news is the bearish engulfing pattern is easy to recognize and really effective. In this guide, I want to tell you more about it.
How to identify the bearish engulfing candlestick pattern at Olymp Trade
There are a few conditions that have to be met so that it is possible to identify the bearish engulfing pattern.
- Number 1. There has to be an upward trend. The pattern that we are talking about forms during the uptrend when the trend is being exhausted, indicating a possible change in market direction.
- Number 2. The bullish candle cannot be bigger than the following bearish one. Remember that the green candle cannot have a form of a Doji because they can be easily absorbed so it wouldn’t mean anything.
- Number 3. The bullish candle must be fully engulfed. And the bigger the bearish candle, the more selling pressure is visible on the chart.
The bearish candle’s open is higher than the high of the earlier candle, and the close of the bearish one is lower than the low of the bullish candle. In other words, the body of the bearish candle fully covers the whole previous candle. But on liquid markets on an intraday scale, this kind of situation is unlikely. That is why it is customary that it is enough if the bearish candle body covers the previous candle’s body.
You will find the bearish engulfing candlestick pattern at the top of an upward trend when bears eventually gain control over the market.
- Helps traders predict potential market reversals.
- Relatively easy to identify on a chart.
- Offers robust signals when used correctly.
- May lead to false signals if not properly confirmed.
- The bearish engulfing pattern needs to occur at the top of an uptrend, so it may not be as helpful in a sideways or downward trend.
- Over-reliance on a single indicator can lead to errors. Always use it in conjunction with other indicators and market analysis tools.
|Candlestick Patterns||Use in Trading|
|Bearish Engulfing Pattern||Indicates potential market reversal during an uptrend|
|Bullish Engulfing Pattern||Suggests possible market reversal during a downtrend|
Employing the bearish engulfing pattern in trading at Olymp Trade
Identifying the pattern is not much complicated. Remember, it forms at the peak of the uptrend when the bears take over the market. A bearish engulfing pattern signifies the reverse in the trend. Wait till the bearish candle forms fully to confirm the beginning of the downward trend. Also, the last bullish candle cannot be a doji for a bearish engulfing pattern to develop. Once all conditions are met, you should enter a sell position.
Above you can see an interesting example of the bearish engulfing pattern. Red candle body covers not only the previous body but also 4 more. This kind of signal is a very strong confirmation of a trend reversal.
Learn and practice using the bearish engulfing candlestick pattern. There is a free demo account at Olymp Trade. Open one, if you haven’t yet, and share your thoughts with us.
Best of luck!
- Q: How does the bearish engulfing pattern signal a potential market reversal?
- A: The pattern forms when a smaller bullish candle is followed by a larger bearish one, indicating that selling pressure has taken over the market.
- Q: How can I confirm a bearish engulfing pattern?
- A: Wait for the bearish candle to fully form and confirm that it engulfs the previous bullish candle. It’s also helpful to look at other indicators or trends in the market for confirmation.
- Q: How often does the bearish engulfing pattern occur?
- A: This varies based on market conditions and the timeframe you’re observing. The pattern occurs more frequently in volatile markets.
- Q: What does it mean if the bearish engulfing pattern appears during a downtrend?
- A: This pattern typically signals a reversal of an uptrend. If it appears during a downtrend, it may not provide a reliable signal.
- Q: Can I use the bearish engulfing pattern in all types of trading?
- A: Yes, the bearish engulfing pattern can be used in different types of trading like day trading, swing trading, or even long-term trading. However, it’s most effective in its designed context – signaling potential reversals in uptrends.
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