Bearish Engulfing Candlestick Pattern: How to Trade, Psychology and 3 Pro Tips

Now, in the candlestick series, we have reached the Bearish Engulfing Candlestick. Earlier, I had thoroughly explained what Bullish Engulfing is, along with its psychology and how to trade it. If anyone wants to read that, they can check it out.

In this article, I will thoroughly explain how the Bearish Engulfing Candlestick works and how to trade using it, so you can execute your trades effectively.

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What is a Bearish Engulfing Candlestick?

The Bearish Engulfing is a reversal candlestick pattern that signals a downward move in the market. It works very effectively if understood properly. This pattern consists of two candlesticks: the first one is green (bullish), while the second one is red (bearish). The red candlestick completely engulfs the green one, indicating a potential shift in momentum from bullish to bearish.

What is the Psychology Behind Bearish Engulfing Candlestick?

Whether I do anything else or not, I always explain the psychology behind every candlestick, because it’s incredibly important. If you truly understand the psychology behind these patterns, most of your trades will likely be successful.

Let’s add more depth to the psychology behind the Bearish Engulfing Candlestick:

1. The Trap Setup:
   • The first green candle gives a false sense of security to buyers. They believe the uptrend will continue and enter the market with buy orders.
   • When the second candle opens higher, it further strengthens this illusion, attracting more buyers and creating a liquidity pool.
2. Seller Domination:
   • As the second candle progresses, sellers aggressively push the price downward.
   • The bears not only erase all the gains of the green candle but close even lower, signaling a complete rejection of higher prices.
3. Market Sentiment Shift:
   • The pattern reflects a drastic change in sentiment: from optimism (buyers) to pessimism (sellers).
   • This shift indicates that the buying pressure is exhausted, and the selling pressure is likely to dominate moving forward.
4. Volume Confirmation:
   • Often, the volume during the second (red) candle is higher than the first (green) candle.
   • This shows strong participation from the bears, confirming their intent to drive prices lower.

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Real-Life Example:

Think of it like a tug-of-war game.

• The bulls win the first round (green candle) and feel confident.
• In the second round (red candle), the bears not only defeat the bulls but drag them far past the starting point, showing overwhelming strength.

Why It’s Powerful:

The Bearish Engulfing Candlestick is powerful because it not only shows a lack of strength in buyers but also highlights the aggressive nature of sellers, signaling a potential trend reversal or continuation of a downtrend.

Understanding this psychology helps traders anticipate future price movements and position themselves for profitable trades.

How to Trade by Using Bearish Engulfing Candlestick?

Now, let’s look at how to trade using the Bearish Engulfing Candlestick, as this is the most important part and the reason many of you are here.

The Bearish Engulfing Candlestick is a powerful signal for identifying potential trend reversals. Here’s a step-by-step guide to trading with it:

1. Identify the Pattern in the Right Context

• Look for the Bearish Engulfing Candlestick in key areas such as:
  • Resistance zones: Indicates the price is rejecting higher levels.
  • Overbought conditions: When the market has risen significantly and shows signs of exhaustion.
  • After a strong uptrend: A reversal signal is more reliable when the market has been consistently moving upward.

2. Confirm the Pattern with Volume

• Higher volume on the engulfing candle adds credibility to the pattern.
• This indicates strong selling pressure and increases the likelihood of a continuation to the downside.

3. Wait for Confirmation (Optional but Safer)

• Instead of entering immediately, wait for the next candle to confirm the bearish trend.
• If the next candle closes lower than the bearish engulfing candle, it confirms the selling pressure.

4. Set Your Entry Point

• Aggressive Entry: Enter as soon as the bearish engulfing candle closes.
• Conservative Entry: Wait for a pullback toward the middle of the bearish engulfing candle for a better risk-to-reward ratio.

5. Place a Stop-Loss

• Above the High of the Pattern: Place your stop-loss a few points/pips above the high of the engulfing candle to account for market noise.
• This protects you from false breakouts or unexpected price movements.

6. Set a Target Price

• First Target: Near the next support level or a Fibonacci retracement level.
• Second Target: If the momentum continues, trail your stop-loss to lock in profits while letting the trade run.

7. Combine with Indicators for Higher Accuracy

• Use technical indicators like RSI (Relative Strength Index) or MACD to confirm overbought conditions or bearish momentum.
• A divergence in RSI (price is rising, but RSI is falling) strengthens the bearish engulfing signal.

8. Monitor Market Conditions

• Bearish Engulfing patterns work better in trending or volatile markets.
• Avoid trading it in a flat or sideways market where the pattern may produce false signals.

Example of a Trade Setup:

Imagine the stock price is in an uptrend and reaches a resistance level. You notice a bearish engulfing candlestick with higher volume:

1. Enter the trade after the engulfing candle closes or after a slight pullback.
2. Set your stop-loss above the pattern’s high.
3. Place your target near the next support zone.

Pro Tip:

Always combine candlestick patterns with other tools, such as trendlines, moving averages, or support/resistance levels, for higher accuracy. Relying on the Bearish Engulfing Candlestick alone can lead to false signals, especially in choppy markets.

By following these steps and maintaining discipline, you can significantly increase your chances of executing successful trades using the Bearish Engulfing Candlestick.

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What is the Engulfing Candlestick Rule?

So, buddy, there are certain rules for trading with candlesticks, and these apply to the Bearish Engulfing Candlestick as well. Let’s go through them to ensure you trade smartly and effectively:

Rules for Trading Using Bearish Engulfing Candlestick

1. Always Look for Confluence

• Don’t trade the pattern in isolation. Combine it with:
  • Support and Resistance Levels: Ensure the pattern forms near a key resistance zone.
  • Trendlines: Check if the pattern aligns with a downward trendline or at the peak of an uptrend.
  • Indicators: Use RSI, MACD, or moving averages to confirm bearish momentum.

2. Pattern Must Be Well-Defined

• The red candlestick should completely engulf the green candlestick.
• Avoid patterns where the engulfing is partial, as they might lead to false signals.

3. Trade in the Direction of the Trend

• Works best as a reversal signal at the top of an uptrend.
• If in a downtrend, it can signal continuation of bearish momentum.
• Avoid using it in sideways or flat markets, as the signal is less reliable.

4. Volume is Key

• High volume on the bearish candle strengthens the validity of the pattern.
• If volume is low, the signal may lack the strength to follow through.

5. Set a Clear Stop-Loss

• Always use a stop-loss: Place it just above the high of the engulfing pattern.
• This ensures you limit losses in case the pattern fails.

6. Wait for Confirmation (If Unsure)

• Sometimes, it’s better to wait for the next candle to close below the low of the bearish engulfing candle before entering.
• This reduces the chances of falling for a false signal.

7. Risk Management

• Never risk more than 1-2% of your trading capital on a single trade.
• Use proper position sizing to protect your account from large losses.

8. Know When Not to Trade

• Avoid trading during major news events, as high volatility can invalidate patterns.
• Don’t rely on the pattern alone in low liquidity markets, as movements may be random.

9. Set Realistic Targets

• First target should be the nearest support zone.
• If the price continues downward, trail your stop-loss to secure additional profits.

Pro Tip:

The Bearish Engulfing Candlestick is not just about the pattern itself; it’s about the context in which it appears. Stick to these rules, and you’ll filter out weak signals while increasing the probability of successful trades.

By following these rules, you’ll trade with confidence, minimize risks, and improve your chances of capturing profitable opportunities.

How do you confirm an engulfing candlestick?

To confirm an Engulfing Candlestick, whether it’s Bullish Engulfing or Bearish Engulfing, you need to follow certain steps to ensure the pattern has significant validity. Here’s a detailed guide on how to confirm it:

Steps to Confirm an Engulfing Candlestick:

1. Check for Proper Formation

• The second candlestick must completely engulf the first one.
  • Bullish Engulfing: The second (green) candle should be larger and completely cover the first (red) candle.
  • Bearish Engulfing: The second (red) candle should be larger and completely cover the first (green) candle.
• The body of the second candlestick must be larger than the first and should engulf the open and close of the first candle.

2. Look for Trend Context

• The Engulfing pattern should occur in the direction of the prevailing trend:
  • Bullish Engulfing works best in an uptrend or at the bottom of a downtrend (reversal signal).
  • Bearish Engulfing works best in a downtrend or at the top of an uptrend (reversal signal).
• Engulfing patterns in sideways or choppy markets can give false signals, so avoid them.

3. Volume Confirmation

• Higher volume on the engulfing candle is a strong confirmation.
  • A larger volume on the second candle shows strong participation and increases the likelihood of the pattern being valid.
• If the engulfing candle appears with low volume, it may be less reliable.

4. Wait for the Next Candle

• For confirmation, wait for the next candle to provide additional insight:
  • Bullish Engulfing: The next candle should close higher than the close of the engulfing candle to confirm the bullish momentum.
  • Bearish Engulfing: The next candle should close lower than the low of the engulfing candle to confirm the bearish momentum.
• This reduces the chances of a false breakout and confirms that the pattern is not a mere spike.

5. Check for Overbought/Oversold Conditions (with Indicators)

• Use indicators like RSI (Relative Strength Index) to verify the overbought or oversold conditions:
  • Bullish Engulfing in an oversold region (RSI < 30) is a stronger buy signal.
  • Bearish Engulfing in an overbought region (RSI > 70) is a stronger sell signal.

6. Look for Support and Resistance Zones

• Engulfing patterns near support or resistance zones add credibility:
  • Bullish Engulfing: When it forms near a strong support level or at the bottom of a downtrend, it’s more likely to lead to a bullish reversal.
  • Bearish Engulfing: When it forms near a strong resistance level or at the top of an uptrend, it’s more likely to lead to a bearish reversal.

7. Check for Candle Gaps (Optional)

• In some cases, gaps between the candlesticks can confirm an Engulfing pattern, especially in markets with strong momentum.

Final Confirmation Tips:

• Avoid false signals by confirming the pattern with multiple factors (trend, volume, indicators, support/resistance).
• Do not rely solely on the Engulfing candlestick — it’s essential to confirm the pattern with the factors above to ensure its reliability.

By following these steps, you can accurately confirm Engulfing candlestick patterns and make more informed trading decisions.

Conclusion on the Bearish Engulfing Candlestick

So, buddy, this was all about the Bearish Engulfing Candlestick, and this is one of the best-explained articles on the topic. In this article, I’ve taught what the Bearish Engulfing Candlestick is, how it works, its psychology, and the rules to follow.

If anyone needs any improvements in this article, feel free to contact Street Investment. Also, if you need any help related to trading, don’t hesitate to reach out. Thank you, and happy trading journey to all of you!