What Is a Bearish Engulfing Pattern?

A bearish engulfing pattern is one kind of chart pattern that indicates upcoming price declines. The pattern consists of an up (green or white) candlestick followed by a big down (red or black) candlestick that eclipses or "engulfs" the smaller up candle. The pattern may be significant since it indicates that sellers have surpassed buyers and are pushing the price down more forcefully (down candle) than purchasers were able to drive it up (up candle).

The Bearish Engulfing Pattern: What Does It Mean?

Some upward price movements conclude with a bearish engulfing pattern. It is characterized by the first candle of upward momentum being absorbed by a second, larger candle signaling a change towards lower pricing. When the engulfing candle's open price is considerably above the closure of the first candle, and when the engulfing candle's closing is below the first candle's open, the pattern is more reliable. A significantly larger down candle indicates greater strength than one that is only marginally larger than the up candle.

The pattern is also more consistent when it follows a clear upward trend. Several engulfing patterns will occur if the price action is choppy or range-bound, but they are unlikely to result in significant price movements because the general price trend is choppy or range-bound.

Before taking action on the pattern, traders often wait for the second candle to close before taking action on the third candle. When a bearish engulfing pattern appears, one may sell a long position or enter a short position.

While using bearish engulfing patterns, astute traders evaluate the overall picture. For instance, if the rally is strong, it may not be prudent to trade short. Even the emergence of a bearish engulfing pattern may not be sufficient to halt the rise for an extended period of time. This is because the bearish engulfing pattern represents a continuation of the trend. However, suppose the overall trend is down and the price has just had a pullback to the upside. In that case, a bearish engulfing pattern may offer a favorable chance to short the security, as the transaction will be in line with the longer-term downtrend.

What Separates a Bullish Engulfing Pattern from a Bearish Engulfing Pattern?

These two designs are total opposites. After a price decline, a bullish engulfing pattern appears, which indicates future price increases. The first candle in the two-candle arrangement is a bearish candle. The second candle is a larger bullish candle with a real body that completely encompasses the smaller down candle.

The Bearish Engulfing Pattern's Limitations

Following a clean upward price advance, engulfing patterns are beneficial since they plainly indicate a shift in momentum to the negative. If the price action is choppy, even if the price is generally rising, the significance of the engulfing pattern is decreased because it is a rather common indicator.

The second or enveloping candle may likewise be enormous. If a trader chooses to trade the pattern, this could result in an extremely big stop loss. The possible gain from the trade may not be sufficient to warrant the risk.

With engulfing patterns, it might be difficult to determine the potential profit because candlesticks do not indicate a price target. Instead, traders will need to utilize other techniques, such as indicators or trend analysis, to choose a price goal or decide when to exit a good trade.

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