Bearish Engulfing Candlestick Patterns – Trading Strategies and More

adminMay 10, 2024

Bearish Candlestick Pattern: Technical analysts rely heavily on charts and candlestick patterns to conduct comprehensive analysis of stock prices and accurately predict future movements. Each pattern formed in the market has a clear and legitimate reason for its formation and indicates the direction of the market.

In this article, we will discuss the meaning, formation, indication of two candlestick patterns called bearish candlestick patterns and how to set up trades with this pattern formation.

Bearish Engulfing Candlestick Patterns – Definition

The Bearish engulfing candlestick pattern is one of the patterns that appears frequently. These two candlestick patterns indicate that the bullish sentiment in the market is likely to shift to bearish sentiment. The two candles in this pattern are:

The first candle is bullish (green candle), indicating an upward movement in price.
The second candle is a bigger downtrend (red candle) than the previous candle. This candle also opens higher than the previous candle’s close and closes lower than the previous candle’s open price. That is, the actual body of the second red candle must cover the actual body of the first green candle.

This pattern can appear anywhere in any trend in the market, but when this pattern forms during an uptrend, the strength of the bearish indication increases.

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Bearish Engulfing Candlestick Pattern Interpretation

The formation of this pattern provides an early sign of a potential bearish reversal. Therefore, if market participants observe this pattern forming in stocks they hold long positions in, they may consider liquidating their positions.

Additionally, since this pattern indicates a change in market sentiment, traders may consider entering a short position following the formation. Additional confirmation of a bearish reversal can also be obtained using other indicators such as RSI.

Market participants should also keep in mind that if this pattern forms in a sideways or choppy market, the likelihood of a downside reversal will be reduced. This is because this pattern has a higher probability of functioning if it appears during an uptrend.

Bearish Engulfing Candlestick Patterns – Psychology

The first candle is a trend-following green candle, as the pattern usually follows an uptrend followed by a downtrend. This shows there is more buying pressure pushing the stock price higher. The formation of the next large red candle then shows a change in market sentiment and a sharp increase in selling pressure.

The formation of this pattern indicates a change in market sentiment and requires buyers to be more cautious when purchasing stocks. The number of sellers may also increase due to changes in market sentiment.

Bearish Engulfing Candlestick Patterns – Strength

There are several situations in which the formation of this pattern becomes stronger. bearish reversal indicator The situation is as follows:

After a significant upward trend – If this pattern forms after a significant rise in stock prices, the likelihood of a downtrend reversal becomes higher. This is because the formation of this pattern signals a change in sentiment and those who have taken long positions in an uptrend can begin to take profits.
RSI in overbought area – If RSI is also in overbought territory at the time this pattern is formed, the price is more likely to fall.
Formed in a strong resistance zone – A resistance zone forms when a stock’s price reacts to a particular price more than once, or reaches that price more than once and then falls in price. If the price reacts to that price multiple times, a strong resistance zone is formed. So, if this pattern forms in that area, it indicates that the price has reacted again and probably won’t go above that price.