Bearish Engulfing Pattern: How Sellers Take Back Control

The Bearish Engulfing pattern is a Japanese candlestick pattern that signals a drop in prices in the future after a strong rally. The pattern is made up of a small-bodied bullish candle followed by a larger bearish candle that fully engulfs the smaller bullish candle before it. This pattern can matter because it shows that sellers have overtaken buyers and pushed the price down with greater force, after buyers had managed to push it up for a short time.

Read more: Learn about the most famous Japanese candlestick patterns

Key points of the Bearish Engulfing pattern:

• The Bearish Engulfing pattern can occur anywhere on a chart, but it is more significant when it forms after a clear, strong price rally. It can mark either a continuation pause within an uptrend or a pullback that reverses into a larger downtrend.
• For the pattern to be ideal, both candles need a clear size relative to the prices around them. A very small bullish candle followed by a medium bearish candle can still form a bearish engulfing pattern, but it carries far less weight than when the two candles are of balanced size.
• What matters is the real body of each candle — the difference between the open and close prices — since the real body of the bearish candle must engulf the real body of the bullish candle.
• This pattern is far less significant in volatile or sideways-trending markets.

What does the Bearish Engulfing pattern tell you?

The Bearish Engulfing pattern appears at the end of some upward price moves. It is marked by the first, bullish-momentum candle being overtaken, or engulfed, by a larger second candle that signals a shift toward lower prices. The pattern carries more weight when the open 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. A larger bearish candle shows more strength than one that is close in size to the bullish candle before it.

The Bearish Engulfing pattern is also more reliable when the prior move up was clean rather than choppy. If price action is volatile or wide-ranging, many engulfing patterns will appear but are unlikely to lead to significant price moves, since the overall trend itself is choppy or sideways.

Before acting on the pattern, traders typically wait for the second, bearish candle to close before taking any selling action on the asset. That action can be a longer-term sell or a short-term sell. When entering a new sell position, a stop-loss can be placed above the top of the Bearish Engulfing pattern.

In the end, traders weigh the bigger picture when using the Bearish Engulfing pattern to enter a sell trade if the uptrend is not strong — sometimes the formation of a Bearish Engulfing pattern on its own is not enough to stop a long rally. If the broader trend is downward and the price has been correcting toward the upside, a Bearish Engulfing pattern can offer a stronger sell opportunity, since the trade then lines up with the longer-term downtrend. The chart below shows an example of a Bearish Engulfing pattern:

In this chart, the pair’s trading range starts to narrow, pointing to a slowdown in the upward move before the pattern forms — after which price turned lower, and in this particular example the trade would have worked out very well.

Limits of using the Bearish Engulfing pattern:

Bearish Engulfing patterns are most useful after a clear upward price move, where the pattern clearly shows the shift in momentum to the downside. If price action is choppy and sideways — even while the price is generally rising — the significance of the Bearish Engulfing pattern shrinks, since it is a fairly common signal during that kind of sideways volatility.

The second, bearish candle can also turn out to be very large, which can leave a trader with a very wide stop-loss if they choose to trade the pattern — and that may not justify the trade’s potential profit against its risk.

Setting a profit target is also difficult with engulfing patterns, since candlesticks alone don’t provide a price objective. Here, traders need other methods, such as indicators or trend analysis, to choose a price target or decide when to exit a trade for a profit.

The Bearish Engulfing pattern is a technical chart pattern that signals a drop in future prices. It consists of an upper white or green candle followed by a large black or red down-candle that engulfs the smaller upward candle. The Bearish Engulfing pattern can be significant because it shows that sellers have overtaken buyers and pushed the price down with greater force in the form of a down candle, more than buyers were able to push it up.

Read more:

• What is the Shooting Star pattern?
• The long-tailed pin candle and how to trade it
• The best 9 patterns for mastering Japanese candlesticks in trading

[AFF-CTA: pending]

Related articles

• Sushi Roll Pattern
• Hammer Candlestick Pattern
• Hanging Man Pattern
• Engulfing Pattern Strategy
• Heikin Ashi Trading Strategy