All About Bearish Engulfing

The stock market is dominated by two types of participants: traders and investors. Investors have a longer-term perspective and keep the financial assets they purchase. Traders buy and sell quickly. For long-term investing, traders must identify short-term price movements. Technical charts can help identify patterns and predict short-term price trends.

Candlestick charts are one of the most used charts for trading. There are many patterns that the candles can form, such as the shooting star pattern, piercing pattern and bearish engulfing. These patterns are used by traders to predict price movements and then act accordingly. The bearish-engulfing candlestick is an important pattern. It forms at the top end of an uptrend and signals that there has been a reversal. Let's first understand candlestick charts before we move on to the bearish-engulfing pattern.

Candlestick charts

In Japan, candlestick charts were created to show price movements using different colours. The chart is made up of several candles, which represent the opening, closing, high, and low prices for a specific period. A rectangle portion of the candlestick, known as the real body, shows the difference between the closing and opening prices. The real body has two lines that protrude from both ends. These lines, also known as shadows or wicks tell you the highest and lowest prices for an interval.

It is a down candle if the closing price is lower that the opening price. This candle is filled with red color and is called a shaded green or red. It is, on the other hand, known as an up candle when it closes at a higher price than the opening price.

Bearish Engulfing Pattern

An uptrend ends with a bearish engulfing trend. It signals a change in the trend. This indicates that the sellers will outpower the buyers, which would cause the price to drop. The bearish engulfing patterns is formed by two candles. It is a pattern that occurs when a green, up or red candle is followed by an up or down candle. This is called the bearish-engulfing.

A bullish engulfing signal is a strong shift in sentiment. The bullish engulfing patterns are formed when the gap up at the opening of the market has been filled and the down candle that forms engulfs its predecessor. When the opening price of a day is higher that the closing price, the gap up is formed. This is a bullish sign. However, since the bearish-engulfing pattern represents a reversal in trend, the gap up fills quickly.

Reliability for bearish engulfing patterns

Candlestick charts do not always show the same patterns as they should. If the candle's opening is much larger than the candle it engulfs, a bearish engulfing candles is more reliable. This basically means that there is a significant gap up. The closing of the down candle should not be lower than the opening of an up candle. In a choppy market, the bearish engulfing candlestick patterns is not reliable as it can lead to many engulfing patterns without sufficient clarity.

How do you use a bearish-engulfing pattern

A bearish engulfing signal is a sell sign. Traders generally take short positions once the pattern has formed. In real life, traders can use a variety of approaches. Let's have a look at the daily candlestick chart. Each candle represents the price movement for the day.

- An indicator of a stronger downtrend is a volume increase that occurs during the formation the engulfing candles. Aggressive traders will sell at the end the day that the engulfing candles are formed.

To confirm a trend, some traders wait until a bearish-engulfing pattern has formed. If the bearish-engulfing pattern does not appear to be very strong, it is necessary to confirm the trend.

Traders look for other signals than the bearish trend of price breaking below the upward support level. When combined with other signals, the bearish engulfing trend becomes more convincing.

Conclusion

It is always recommended to only take action when there are other indicators. Trading is always risky.