(Bearish Engulfing)
The bearish engulfing pattern is considered one of the most accurate reversal patterns in Japanese candlestick analysis, as it provides an early signal of a potential end to the upward trend and the beginning of a strong bearish reversal. Before explaining its details, it is worth mentioning that we previously talked about the bullish engulfing pattern, since both patterns are opposite in direction, and understanding one makes understanding the other much easier.
Definition of the pattern
The bearish engulfing pattern consists of two candles and usually appears at the end of an upward wave. The first candle is bullish (green) and represents the buyers’ final attempt to push the price higher, while the second candle is bearish (red) and is called the engulfing candle because it engulfs the entire body of the first candle. Its opening is equal to or higher than the closing of the previous candle, while its closing is below the opening of the first candle, indicating a clear shift in control from buyers to sellers. The focus in this pattern is on the bodies of the two candles, not the wicks, because wicks represent temporary volatility, while the candle body shows the market’s real strength at the close.
Where does the pattern appear?
The bearish engulfing pattern usually appears at strong resistance zones at the end of an uptrend, and it may coincide with supply areas or price levels that experience heavy selling pressure. Its appearance in these regions signals that sellers have begun defending their levels and that buyers are starting to lose momentum, which paves the way for the beginning of a new downward move.
The psychology behind its formation
To understand the pattern deeply, we need to analyze what happens inside the market during its formation. At the end of an uptrend, market sentiment is positive and buyers are fully in control. A new bullish (green) candle forms, giving a false impression that the upward move will continue. However, on the next candle, sellers step in strongly and begin selling large quantities, causing a clear shift in the balance of power. The second candle closes below the opening of the first one, making it evident that buyers have lost control and sellers are now dominating. This psychological shift is considered a turning point in the overall trend, which is why the pattern is viewed as an early signal of the beginning of a correction or bearish reversal.
How to trade using the pattern?
When the bearish engulfing pattern appears at a clear resistance zone or below a descending trendline, it can be considered a strong selling opportunity, provided that there is confirmation from price action or from higher timeframes. The trading steps are as follows:
- Wait for the engulfing candle to close completely to confirm that the pattern has formed.
- Enter a sell position immediately after the close.
- Place the stop loss a few points above the high of the engulfing candle to avoid the wick.
- Set the target at least three times the value of the stop loss (a 1:3 ratio).
In the practical example, the pattern appeared directly below a descending trendline, which is considered a dynamic (moving) resistance that increased the strength of the signal. Indeed, after the pattern was completed, the price began to drop clearly and reached the target easily.
Important notes
The pattern becomes more reliable when it is accompanied by high trading volume during the formation of the second candle. It is always preferable to seek confirmation using support and resistance levels or other technical tools such as moving averages or supply and demand zones. It is not recommended to use the pattern alone in random areas within the trend, because its appearance outside resistance zones causes it to lose its reversal value.
In summary, the bearish engulfing pattern is a strong reversal signal indicating a shift in market direction from upward to downward, and it reflects the psychological transition from buyer strength to seller dominance. The more you respect the proper conditions for where it appears and manage the trade with discipline, the more accurate and effective the results will be in trading.
