Bearish Engulfing


 

Shape:
The bearish engulfing pattern is a bearish reversal candlestick pattern that typically forms after an uptrend.
It consists of two candles: a smaller bullish candle followed by a larger bearish candle that completely engulfs the real body of the first candle. Shadows are less significant; the focus is on the bodies.
This pattern signals that sellers have taken control, potentially marking the start of a downtrend.

Success Rate:
Historically, the bearish engulfing pattern has a moderate-to-high success rate, especially when appearing at significant resistance levels or after an extended uptrend.
Success rates can vary, but many studies suggest around 60–70% effectiveness when confirmed by volume and other bearish signals.

Sell:
Enter a sell position when the price closes below the low of the engulfing bearish candle, confirming the pattern.
The confirmation candle should ideally be accompanied by increased volume to validate selling pressure.

Take Profit (TP):
Measure the height of the engulfing candle and project this distance downward from the breakout point to set the initial take profit target.
Example: If the height of the engulfing candle is Tk.6 and the breakdown occurs at Tk.100, the target would be Tk.94.

Stop Loss (SL):
Place the stop loss slightly above the high of the engulfing bearish candle.
This helps limit potential losses if the reversal fails and the price resumes its upward move.

Buy:
Consider buying only if the price fails to continue downward and instead breaks above the high of the engulfing bearish candle.
Alternatively, close short positions if the market shows a strong bullish reversal signal.

Profit Trailing:
Use a trailing stop to secure profits as the price moves in your favor.
Adjust the stop loss level downwards as the price falls, keeping it a set distance (e.g., percentage or taka amount) above the current price.

Lot Size:
Determine the lot size based on your account size and risk tolerance.
Ensure that the potential loss (difference between entry price and stop loss) does not exceed a predetermined percentage of your account balance (e.g., 1–2%).

Risk-to-Reward Ratio:
Aim for a favorable risk-to-reward ratio (e.g., 1:2 or higher), where the potential reward is at least twice the potential risk.

Leverage:
Use leverage cautiously. While leverage can amplify gains, it also increases potential losses.
Ensure you understand the impact of leverage on your trades.

Other Conditions:
Confirm the pattern with increased volume on the bearish candle, indicating strong selling pressure.
Check for confluence with other technical signals such as resistance zones, overbought RSI, or bearish divergence.

Caution:
False patterns can occur in sideways markets, leading to losses.
Always wait for confirmation before entering a trade.
Avoid trading bearish engulfing patterns in a strong bullish market without additional confirmation, as the pattern may fail.


Pros and Cons of the Bearish Engulfing Pattern

Pros:

  • Clear Reversal Signal:
    The bearish engulfing clearly shows a shift from buying to selling pressure, especially at key resistance levels.

  • Simple to Identify:
    The two-candle structure is easy to recognize even for beginner traders.

  • High Impact in Strong Trends:
    When occurring after an extended uptrend, it often marks a strong turning point.

  • Works Across Timeframes:
    Can be applied in daily, weekly, or intraday charts for different trading styles.

Cons:

  • False Signals:
    The pattern can fail if the market is in a strong bullish trend, leading to whipsaws.

  • Volume Dependency:
    Low-volume engulfings are less reliable.

  • Requires Confirmation:
    Without follow-through selling in the next sessions, the pattern’s reliability drops.

  • Short-Term Nature:
    Works best for short-to-medium-term moves rather than long-term trend shifts.

Trading Psychology of Bearish Engulfing

Formation:

  • Late Uptrend Buying: In the lead-up to the pattern, traders are optimistic, pushing the price higher.

  • Shift in Control: The first small bullish candle shows reduced buying pressure. The following large bearish candle signals sellers overpowering buyers.

  • Momentum Change: This sudden shift creates doubt among bulls and confidence among bears.

Market Sentiment:

  • Bulls’ Anxiety: Traders holding long positions may start worrying about protecting profits.

  • Bears’ Confidence: Seeing the engulfing candle convinces bears to open short positions, expecting a reversal.

Breakout Psychology:

  • Anticipation: Traders recognize the engulfing and prepare to short when the price breaks the bearish candle’s low.

  • Volume Spike: Increased volume reinforces the perception of a strong reversal.

  • Fear Trigger: The strong down move may trigger stop-losses from long traders, accelerating the fall.

Post-Breakout:

  • Validation: A continued move down confirms the reversal and attracts more sellers.

  • Profit-Taking: Bears begin closing positions at predefined support zones.

  • Trend Watch: Traders monitor for continuation patterns or signs of exhaustion.

Failure and Risk Management:

  • False Reversals: If buyers regain control quickly, the setup fails.

  • Discipline: Stick to stop-loss rules and avoid over-leveraging.

General Tips:

  • Patience: Wait for candle close and confirmation.

  • Discipline: Follow your pre-set entry/exit rules.

  • Awareness: Check higher timeframes for major trend direction.