Bearish Engulfing Candlestick Pattern

Imagine you’re walking in a dark room with just one candle. Suddenly, the candle changes shape and tells you something bad is about to happen. Sounds magical, right?

In the world of stock trading, there is a special candle that does something similar. It’s called the Bearish Engulfing Candlestick Pattern.

This candle doesn’t talk, but it shows you a clear sign:

📉 “The price might fall soon. Be careful!”

Traders love this pattern because it helps them spot when the market might turn from going up to going down. It’s like a warning signal.

In this blog, we’ll learn what this pattern looks like, how to find it, and how you can use it to make better trading decisions — all in super simple words. So, let’s dive in and discover this smart little candle!

🔴 Bearish Engulfing Candlestick Pattern

The Bearish Engulfing Pattern is a special sign in the world of trading. It’s a two-candle pattern that can tell traders when the market might stop going up and start going down.

Here’s how it works:

1. First Candle (Bullish Candle): This candle is green or white (it means the price went up that day).
2. Second Candle (Bearish Candle): The second candle is red or black (it means the price went down that day). This candle is bigger and completely covers (or “engulfs”) the first candle.

When you see the second candle swallow up the first one, it’s like the market is saying:

📉 “The buyers are losing control, and the sellers are taking over.”

That’s why it’s called bearish. The word bearish means the market is going down, just like a bear swiping its paw downwards.

🔎 How to Identify a Bearish Engulfing Pattern

Finding a Bearish Engulfing Pattern is simple! Let’s break it down:

1. Look for Two Candles:
   The pattern needs two candles. The first one should be a small green or white candle (meaning the price went up). The second candle must be a big red or black candle (meaning the price went down).
2. The Second Candle Must Be Bigger:
   The second red candle must completely cover the first green candle. It should be larger than the first one, both in height (price change) and length.
3. The Second Candle Closes Lower:
   The second candle should close lower than the first candle’s opening price. This shows the market has reversed.
4. Look for Confirmation:
   After you see this pattern, wait for the next candle to confirm the signal. If the next candle is red or if the price continues to fall, it’s a good sign that the market is really turning down.

Example:

• Day 1: The market goes up (green candle).
• Day 2: The market goes down (red candle), and it covers the green candle from Day 1.

🧠 Psychology Behind the Bearish Engulfing Pattern

To understand the Bearish Engulfing Pattern, it’s important to think about the psychology of traders in the market.

1. What’s Happening in the Market?

• Day 1: Traders are feeling confident. The price is going up, and they’re buying (this is why the first candle is green or white). They think the price will keep going higher.
• Day 2: But something changes. Sellers step in and start selling their positions. They are not happy with the high price anymore and want to make a profit before the price goes lower. This pushes the price down, and the second candle (the red one) covers the green candle. This tells us that sellers are in control now.

2. Why Does This Happen?

• Sellers take over: The second candle is much larger than the first one, which shows that sellers were stronger than buyers. The market quickly shifts direction from going up to going down.
• Loss of Confidence: The big red candle shows that the buyers are losing confidence, and the sellers now have the upper hand. It’s like the buyers gave up and decided to leave the market, allowing the sellers to take control.

So, when this pattern happens, it’s a signal that the price might keep going down, and traders start to sell.

📊 Real Chart Examples

Seeing this pattern on a real chart can help you understand it better. Let’s walk through a simple example.

Stock Market Example

• Day 1: The stock price starts low and goes up. This forms a green candle.
• Day 2: The stock price goes even higher during the day, but by the end, it drops below the previous day’s price. This forms a larger red candle that covers the green one from Day 1.

Now, let’s see it in action:

• If you look at a stock chart, you might spot a green candle (day one) followed by a red candle (day two) that’s much bigger, covering the first one.
• When you spot this, you know the Bearish Engulfing Pattern is forming, and the market could go down.

Forex Market Example

• Day 1: The price of a currency pair (like EUR/USD) goes up, forming a green candle.
• Day 2: A big red candle follows, showing that the price went down more than it went up on Day 1. This pattern suggests that the price may continue to fall.

Here’s how it looks in a chart:

• You’ll see a green candle followed by a red candle that is larger and engulfs the green one.
• This is the Bearish Engulfing Pattern signaling a possible price drop.

By looking at these real examples, you can practice spotting this pattern in any market: stocks, forex, crypto, or even commodities.

📈 Bearish Engulfing Trading Strategy

Once you spot the Bearish Engulfing Pattern, it’s time to use it for trading. But how do you make money from this pattern? Let’s break it down!

Step 1: Enter the Trade

• After you see the Bearish Engulfing Pattern, wait for the price to confirm it. This means the price should continue falling after the pattern appears.
• You can enter a sell trade when the next candle closes lower than the closing price of the red candle. This is a sign that the downtrend is likely to continue.

Step 2: Set Your Stop Loss

• A Stop Loss is a safety measure. It’s a point where you’ll stop losing money if the trade doesn’t go as planned.
• Place your Stop Loss just above the high of the second red candle (the one that’s covering the first candle). This way, if the price moves against you, you won’t lose too much.

Step 3: Take Profit (TP)

• Take Profit means deciding when you want to exit the trade to lock in your profits.
• For the Bearish Engulfing Pattern, you can take profit at the next support level (a price level where the market often bounces back up). This is where the price might stop falling and start going up again.
• You can also take profit based on a percentage of how far the price is likely to move. For example, a good target might be 2:1 reward-to-risk ratio, which means you aim to make two times more than you risk.

Step 4: Manage Your Trade

• Keep watching the price action after entering the trade. If the price shows signs of reversing and moving up again, you might want to exit your position early to protect your profits.

🔄 Bearish Engulfing Pattern vs Bullish Engulfing Pattern

The Bearish Engulfing Pattern isn’t the only candlestick pattern traders use. There’s also a Bullish Engulfing Pattern, which works in the opposite direction. Let’s see how they differ:

Bearish Engulfing Pattern (What We Just Learned)

• Direction: Signals the market might go down.
• Candles: The second red candle is larger and engulfs the first green candle.
• When to Use: You would use this pattern when you think the price is going to drop.

Psychology: Sellers are taking over, and the buyers are losing control.

Bullish Engulfing Pattern (The Opposite)

• Direction: Signals the market might go up.
• Candles: The second green candle is larger and engulfs the first red candle.
• When to Use: You would use this pattern when you think the price is going to rise.

Psychology: Buyers are taking over, and the sellers are losing control.

Key Differences:

• The Bearish Engulfing pattern shows a possible market downturn, while the Bullish Engulfing pattern shows a possible market upturn.
• The Bearish Engulfing involves a larger red candle engulfing a smaller green candle, while the Bullish Engulfing involves a larger green candle engulfing a smaller red candle.

Which One to Use?

• Bearish Engulfing is used when you think the market is going to fall.
• Bullish Engulfing is used when you think the market is going to rise.

Both patterns are helpful, but timing and market conditions are key! Be sure to practice spotting both patterns before trading with real money.

🔍 How Reliable is the Bearish Engulfing Pattern?

The Bearish Engulfing Pattern is a powerful tool, but like any trading strategy, it isn’t perfect. Let’s take a look at how reliable it is.

1. Success Rate

The Bearish Engulfing Pattern is not always perfect. It works well in trending markets when the price is moving strongly in one direction. However, in sideways or choppy markets, it can be less reliable.

• In a strong downtrend, the Bearish Engulfing Pattern is usually a good signal to sell because the price is already falling, and the pattern confirms that more selling is likely.
• In a sideways market, the pattern may show a short-term drop, but the price might quickly go back up again, leading to false signals. This is called a false breakout.

2. Confirmation is Key

The pattern becomes more reliable if you get confirmation from other factors like:

• A strong trend before the pattern forms.
• A follow-up candle that confirms the price keeps going down after the pattern appears.
• The pattern appearing at key support or resistance levels.

In general, the more confirmation you get from other signals, the more reliable the pattern becomes.

3. Risk Management

Even if the pattern works well, you should always use risk management tools like stop losses. No pattern is 100% reliable, and market conditions can change quickly.

📊 Best Indicators to Use With Bearish Engulfing

To make the Bearish Engulfing Pattern even more powerful, you can combine it with other indicators that help confirm the signal. Let’s look at a few popular ones:

1. Relative Strength Index (RSI)

• What It Does: The RSI shows if a market is overbought or oversold.
• How It Helps: If the RSI is above 70 (overbought) and a Bearish Engulfing pattern forms, it’s a stronger sign that the price might fall. If the RSI is below 30 (oversold) and the Bearish Engulfing pattern forms, it could be a warning that the price might reverse up instead.

2. Moving Averages

• What It Does: Moving averages smooth out price action and show the overall trend.
• How It Helps: If the Bearish Engulfing pattern forms below a moving average (e.g., 50-day or 200-day moving average), it confirms that the market is in a downtrend, making the pattern more reliable.

3. MACD (Moving Average Convergence Divergence)

• What It Does: MACD shows the relationship between two moving averages of a stock’s price.
• How It Helps: If the MACD shows bearish divergence (when the MACD line crosses below the signal line) along with the Bearish Engulfing pattern, it adds more confidence to the signal that the market is likely to keep falling.

4. Volume

• What It Does: Volume shows how many shares or contracts were traded during a particular period.
• How It Helps: If the Bearish Engulfing pattern forms with high volume, it means that many traders are selling, which makes the pattern more reliable. If the volume is low, the signal might not be as strong.

5. Bollinger Bands

• What It Does: Bollinger Bands show the range of price movements by using a moving average and two standard deviations.
• How It Helps: If the price is at the upper band and a Bearish Engulfing pattern forms, it’s a sign that the price could be overbought and might fall. If the price is at the lower band, the pattern may not be as strong, and a reversal could happen instead.

❓ Common Questions (FAQs)

🏁 Conclusion

The Bearish Engulfing Candlestick Pattern is a simple but powerful tool for spotting when a market might start going down. It shows a shift in power from buyers to sellers, and it can help you enter smarter trades.

But remember:

• Don’t rely on this pattern alone.
• Always combine it with technical indicators.
• Use Stop Loss and Take Profit to protect your money.
• Practice spotting it on charts before trading real money.

Learning how to read candlestick patterns is like learning the language of the market. And the Bearish Engulfing pattern is one of the best places to start!