What Is a Bearish Engulfing Pattern?
A Bearish Engulfing Pattern is formed by 2 candlesticks. The first candle is a short green body that is completely engulfed by the second larger red candle. The Bearish Engulfing pattern appears in a uptrend and can be identified when a small green candlestick showing a bullish trend, is followed the next day by a large red candlestick, showing a bearish trend, the body of which completely engulfs the body of the previous day’s candlestick.
Example of a Bearish Engulfing Pattern
What Does the Bearish Engulfing Pattern Signal?
The Bearish Engulfing Pattern signals bearish momentum is about to overtake the long buyers in the market. It is seen at the end of some upward price movements, illustrated by a short green body completely engulfed by the second larger red candle. This signals that bears have overtaken the bulls in the market and that a great bearish rally with momentum is beginning to take place. A bearish engulfing pattern means that bulls controlled the price of the asset all the while during the 1st candle only to have bears decisively take over by the close of the next second candle.
The pattern has greater confirmation when the open price of the engulfing candle is well above the close of the first candle, and when the close of the engulfing candle is well below the open of the first candle. Before hopping on the trade right away, traders typically wait for the second engulfing candle to close and then take action on the next following candles.
Trading a Bearish Engulfing Pattern
When looking at a candlestick chart, you may notice a small bullish movement in price. This is then followed by a Bearish Engulfing Pattern, where the small green candlestick is overshadowed by the large red candlestick. The pattern indicates selling interest in the markets, and if you were to enter a trade short at the open of the candle you will end up making decent profits.
Looking at the chart of Bitcoin on a 4-hour time frame, we see a big market sell off that was originated or signaled by a bearish engulfing pattern. The candles I have circled on the chart were the key deciding factors in determining the price of Bitcoin. Many bulls saw these first two green candles and thought that there would be a third green forming a three white soldiers pattern and the trend would reverse from there. Oh how they were wrong! The market makers painted a bearish engulfing pattern on the next 4h candle and that set the tone for a dump. From that single bearish engulfing candle, the price dipped from just under $8000 all the way down to $4250 and eventually stabilizing at $5000.
Looking at the chart of PLUG on the 2-hour time frame we can see a bullish trend halted by a bearish engulfing candle. The start of the uptrend starts with a gap up at around $11.50 and ends at a little under $19 with a bearish engulfing pattern signaling the top of the trend before it dumps down to $14.77.
Similarities Between the Bullish Engulfing and Bearish Engulfing Pattern
The Bullish Engulfing Pattern and Bearish Engulfing Pattern are two complete opposites, but what they have in common is the fact that they are both reversal patterns found at either the top or bottom of a move in the markets. They are the exact same pattern, just inverse of each other. Bullish occurs at the bottom of the market indicating a bullish reversal, while the bearish engulfing occurs at the top of the market indicating a bearish reversal.
Differences Between the Bullish Engulfing and Bearish Engulfing Pattern
Limitations of Bearish Engulfing Patterns
It is important to know that this chart pattern helps to identify a potential reversal which suggests that the market has found its top and the bearish engulfing candle pattern is just a result clearly indicating a reversal. It is just as important to know that a bearish engulfing pattern consists of just 2 candlesticks, and that’s it. It is very difficult to identify a true reversal just based off of these 2 candles, you need to use other means of technical analysis and zoom out on your candlestick chart to get a full picture of this pattern.