Bearish Engulfing Candlestick: Definition, How to Use in Trading and Analysis
The Bearish Engulfing candlestick is a technical analysis tool used by traders to identify potential trend reversals from an uptrend to a downtrend.
While the Bearish Engulfing pattern does not guarantee a trend reversal, it can help identify potential entry and exit points and adjust trading strategies to align with current market conditions.
The article will help you understand all there is to Bearish Engulfing. To keep things less cumbersome, we will also adopt a question-and-answer approach.
So, question one;
How Do You Identify a Bearish Engulfing Candlestick Pattern?
To identify a Bearish Engulfing candlestick pattern, you should look for the following characteristics:
a. Upward trend: The Bearish Engulfing pattern usually appears in an upward trend, indicating a potential reversal.
b. Bullish candlestick: The first candlestick in the pattern is typically bullish
c. Bearish candlestick: The second candlestick in the pattern is a bearish candlestick representing a bearish sentiment.
d. Engulfing: The bearish candlestick’s body completely engulfs the bullish candlestick’s body, which opens above the white candlestick’s high and closes below its low.
To better understand what the pattern looks like let’s show you a graphical presentation of Bearish engulfing.
What are the characteristics of a bearish engulfing candlestick pattern?
The pattern can look like this:
If we zoom out such a pattern can take a form like this:
Bearish Engulfing Candlestick Pattern Backtest
We recommend backtesting absolutely all your trading ideas – including candlestick patterns.
In order to backtest candlestick patterns you need to set specific rules and definitions. That requires both time and effort, but don’t worry: it’s already done for you!
We have defined ALL 75 candlestick patterns and put them into strict trading rules that are testable. Each single candlestick pattern is backtested and includes rules, settings, statistics, probabilities, and performance metrics.
Even better, you get the rules with Amibroker or Tradestation/Easy Language code (in addition to plain English if you like to code yourself, like putting it into a Python trading strategy, for example).
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What Does a Bearish Engulfing Candlestick Pattern Indicate?
A Bearish Engulfing candlestick pattern indicates a strong bearish sentiment and the potential reversal from an uptrend to a downtrend. It suggests that the bears (sellers) have taken control of the market and are pushing the price down. This can be seen as a warning sign for traders who are holding long positions, as it suggests that the uptrend may be coming to an end.
What Is the Logic Behind a Bearish Engulfing Candlestick Pattern?
The logic behind a Bearish Engulfing candlestick pattern is that it indicates a shift in market sentiment from bullish to bearish. In an uptrend, a Bearish Engulfing pattern suggests that the bears (sellers) have taken control of the market and are pushing the price down. This can be seen as a warning sign for traders who are holding long positions, as it suggests that the uptrend may be coming to an end.
What Is the Bearish Engulfing Candlestick Pattern Used For?
Traders use the Bearish Engulfing candlestick pattern to identify potential trend reversals and make informed trading decisions. When a Bearish Engulfing pattern appears in an uptrend, it may signal that the uptrend is coming to an end and that the price is likely to start moving downward. As a result, traders holding long positions may consider closing their positions or taking other protective measures to minimize their risk.
On the other hand, traders looking to enter the market in a short position may use the Bearish Engulfing pattern as an opportunity to enter the market, betting that the price will continue to move downward.
What Is the Difference Between a Bearish and a Bullish Engulfing Candlestick Pattern?
The main difference between a Bearish Engulfing candlestick pattern and a bullish engulfing candlestick pattern is the direction of the trend reversal.
A Bearish Engulfing pattern indicates a reversal from an uptrend to a downtrend, while a bullish engulfing pattern indicates a reversal from a downtrend to an uptrend.
In terms of the candlesticks themselves, the Bearish Engulfing pattern consists of a white candlestick followed by a black candlestick. In contrast, the bullish engulfing pattern consists of a black candlestick followed by a white candlestick.
How Do You Trade Using a Bearish Engulfing Candlestick Pattern?
There are several ways to trade using a Bearish Engulfing candlestick pattern. Some traders may close their long positions and enter short positions when a Bearish Engulfing pattern appears in an uptrend. Others may hold onto their long positions but adjust their stop-loss orders to lower prices to minimize risk.
Traders looking to enter the market on a short position may also use the Bearish Engulfing pattern as an opportunity to enter the market, placing a stop-loss order above the high of the white candlestick and targeting a profit at a support level below the current price.
It’s important to note that the Bearish Engulfing pattern does not guarantee a trend reversal. It should be used in conjunction with other technical analysis tools and strategies. Managing risk effectively and using stop-loss orders to protect against potential losses is also important.
What Strategies Can Be Used To Trade a Bearish Engulfing Candlestick Pattern?
Several strategies can be used to trade a Bearish Engulfing candlestick pattern. Some traders may close their long positions and enter short positions when a Bearish Engulfing pattern appears in an uptrend. Others may hold onto their long positions but adjust their stop-loss orders to lower prices to minimize risk.
Traders looking to enter the market on a short position may also use the Bearish Engulfing pattern as an opportunity to enter the market, placing a stop-loss order above the high of the white candlestick and targeting a profit at a support level below the current price.
It’s important to note that the Bearish Engulfing pattern should be used in conjunction with other technical analysis tools and strategies. Risk management is crucial when trading with this pattern.
How Do You Calculate the Stop Loss for a Bearish Engulfing Candlestick Pattern?
The stop-loss order should be placed above the high of the white candlestick, when trading a Bearish Engulfing candlestick pattern. This is because the black candlestick in the pattern opens above the high of the white candlestick and closes below its low, indicating a strong bearish sentiment. By placing the stop-loss order above the high of the white candlestick, the trader can protect against potential losses if the market does not move in the expected direction.
What Is the Success Rate of a Bearish Engulfing Candlestick Pattern?
The success rate of the Bearish Engulfing candlestick pattern is between 55 to 65% in the stock market. We know that with certainty because we have backtested and quantified all 75 candlestick patterns and backtested it on S&P 500.
However, the success rate of a Bearish Engulfing candlestick pattern is dependent on the sell signal you are using, as it is influenced by various factors, including market conditions, volatility, and the trader’s risk management strategies. However, the pattern is often considered more reliable when it appears in conjunction with other technical indicators and when a change in market momentum or price action confirms it.
We recommend backtesting. We backtested the Bearish Engulfing pattern and you can get the average gain per trade, the win rate, and how reliable the pattern is.
How Do You Interpret a Bearish Engulfing Candlestick Pattern?
To interpret a Bearish Engulfing candlestick pattern, you should consider the following factors:
a. Trend: The Bearish Engulfing pattern usually appears after an uptrend, indicating a potential reversal.
b. Candlestick bodies: The bearish candlestick completely engulfs the body of the bullish candlestick, indicating a strong bearish sentiment.
c. Candlestick shadows: The shadows of the candlesticks (the wicks or tails) may also provide additional information. If the shadows of the candlesticks are long, it may indicate increased volatility or indecision in the market.
How Reliable Is the Bearish Engulfing Candlestick Pattern?
The Bearish Engulfing candlestick pattern is one of the most reliable candlestick patterns. The win rate is between 55 to 65% and you geta lot fills in the stock market.
The Bearish Engulfing candlestick pattern is important because it can provide traders with valuable insights into the market sentiment and potential trend reversals. By identifying this pattern, traders can make informed decisions about when to enter or exit the market. They can also use it to adjust their trading strategies to align with the current market conditions.
However, like any technical analysis tool, the Bearish Engulfing candlestick pattern is not a guarantee of future market movements. So, suppose your goal is identifying potential trend reversals and making informed trading decisions. In that case, it is generally more reliable when it is used along with other technical indicators and when a change in market momentum or price action confirms it.
To be exact, you can pinpoint the reliability of the pattern by using a backtest – something we have already done for you.
Are There Any Other Types of Bearish Engulfing Candlestick Patterns?
There are no other specific types of Bearish Engulfing candlestick patterns, but different types of bearish candlestick patterns may indicate a potential trend reversal. These patterns include the dark cloud cover, the evening star, and the bearish harami.
The dark cloud cover pattern consists of a white candlestick followed by a black candlestick, similar to the Bearish Engulfing pattern. However, in the dark cloud cover pattern, the black candlestick opens above the high white candlestick but closes below its midpoint, indicating a weaker bearish sentiment.
The evening star pattern consists of a long white candlestick, a small-bodied candle (either white or black), and a black candlestick. This pattern suggests that the bulls (buyers) are losing momentum and that the bears (sellers) are starting to take control of the market.
The bearish harami pattern consists of a large white candlestick followed by a smaller black candlestick. It suggests that the bulls (buyers) are losing momentum and that the bears (sellers) may be gaining strength.
It’s important to note that these patterns should be used in conjunction with other technical analysis tools and should not be relied upon as standalone indicators of market trends.
How Does the Bearish Engulfing Candlestick Pattern Compare to Other Bearish Reversal Patterns?
The Bearish Engulfing candlestick pattern is similar to other bearish reversal patterns, such as the dark cloud cover, the evening star, and the bearish harami. These patterns indicate a potential trend reversal from an uptrend to a downtrend and are characterized by bearish candlestick formations.
The main difference between these patterns is the specific candlestick formations and the strength of the bearish sentiment they indicate. The Bearish Engulfing pattern consists of a white candlestick followed by a black candlestick, with the body of the black candlestick completely engulfing the body of the white candlestick. This indicates a strong bearish sentiment, as the bears were able to push the price down significantly and wipe out the gains made by the bulls in the previous period.
On the other hand, the dark cloud cover and evening star patterns are formed by a white candlestick followed by a black candlestick. Still, the body of the black candlestick only partially covers the body of the white candlestick. These patterns indicate a weaker bearish sentiment compared to the Bearish Engulfing pattern.
The bearish harami pattern consists of a large white candlestick followed by a small black candlestick, with the black candlestick forming inside the body of the white candlestick. This pattern indicates a potential trend reversal, but the bearish sentiment is weaker than in the dark cloud cover and evening star patterns.
What Are the Risks Associated With Trading a Bearish Engulfing Candlestick Pattern?
There are several risks associated with trading a Bearish Engulfing candlestick pattern. These include:
a. False signals: The Bearish Engulfing pattern does not guarantee a trend reversal and may give false signals. This can lead to losses if the trader takes a position based on the pattern and the market does not move in the expected direction.
b. Market conditions: The reliability of the Bearish Engulfing pattern may vary depending on market conditions. It may be more reliable in specific market environments than in others.
c. Volatility: The Bearish Engulfing pattern may appear during periods of high volatility, which can increase the risk of unexpected price movements.
d. Leverage: If the trader uses leverage to trade, the potential losses can be magnified if the market moves against their position.
How Can Traders Incorporate Risk Management Into Their Strategy When Trading With a Bearish Engulfing Candlestick Pattern?
Traders can incorporate risk management into their strategy when trading with a Bearish Engulfing candlestick pattern in several ways:
a. Use stop-loss orders: Stop-loss orders can be used to protect against potential losses if the market moves against the trader’s position.
b. Use risk/reward ratios: Traders can use risk/reward ratios to determine their trades’ optimal risk/reward ratio based on their risk tolerance and trading goals.
c. Use position sizing: Position sizing can be used to control the amount of risk the trader is exposed to by adjusting trade size based on the level of risk the trader is willing to take.
d. Use diversification: Diversification can spread risk across multiple asset classes or instruments.
e. Use hedging: Hedging can offset potential losses from one position by taking on an opposing position in a different asset. This can protect against market volatility and reduce overall risk.
f. Use risk management tools: There are various risk management tools available to traders, such as volatility stop-loss orders, trailing stop-loss orders, and risk-reward ratio calculators, that can help traders to manage their risk more effectively.
g. Use a risk management plan: Traders need to have a clear risk management plan outlining their risk tolerance and the strategies they will use to manage risk in their trades. This can help ensure they can trade confidently and minimize potential losses.
Two Cents…
The Bearish Engulfing candlestick pattern is a valuable tool for traders looking to identify potential trend reversals and make informed trading decisions. It is generally more reliable when it appears in conjunction with other technical indicators and when a change in market momentum or price action confirms it. However, it is crucial for traders to incorporate risk management into their strategies when using this pattern and to confirm the validity of the pattern before making any trades.
By using the Bearish Engulfing pattern and other technical analysis tools and strategies, traders can make informed decisions about when to enter or exit the market and adjust their trading strategy to align with current market conditions.
Can you improve the Bearish Engulfing Candlestick accuracy?
Yes, you can improve the Bearish Engulfing candlestick by adding another indicator, for example, the RSI. Let’s back up this with statistics and facts:
If we buy every Bearish Engulfing pattern for the S&P and sell after 8 trading days (since 1993 until today), we get 258 trades with an average gain of 0.73% per trade.
However, if we add a filter and only take trades when the 5-day RSI is above 60, we get fewer trades (#58), but the average gain per trade increases from 0.73% to 0.88%.
This is just an example, but by backtesting and data-driven evidence you can play around to find something that is working.
How reliable are Bearish Engulfing Candlestick Patterns?
Bearish Engulfing candlestick patterns are one of the most reliable candlestick patterns. We know that due to the relative frequency of the pattern. There have been 311 instances of Bearish Engulfing patterns in S&P 500 since 1993 until today.
Despite its name, the pattern is pretty bullish.
How frequent is the Bearish Engulfing candlestick pattern?
The Bearish Engulfing candlestick pattern happens very frequently. In the stock market, we have witnessed 311 instances since 1993 until today for S&P 500, which makes it the third most frequent of all 75 candlesticks.
How to Trade using Bearish Engulfing Candlestick in the Stock Market?
The following steps can be helpful for traders using Bearish Engulfing Candlestick in the Stock Market:
- Establish the trading rules of the Bearish Engulfing pattern. This is easy as it requires just two rules. If you are uncertain please check out our candlestick course where we have done it for you.
- Backtest the trading rules to find the average profits, accuracy, win rate, success rate, etc.
What are Examples of a Bearish Engulfing Candlestick Pattern?
The Bearish Engulfing candlestick pattern consists of two candlesticks, the first being a small bullish candlestick, and the second being a larger bearish candlestick that completely engulfs the previous bullish candlestick.
Here are three examples:
The second candlestick totally “engulfs” the body of the first candlestick. Thus, this is a very easy candlestick pattern to spot on the chart, and it’s also very easy to backtest.
Can You Trade Bearish Engulfing Candlestick Pattern with RSI?
Yes, absolutely, traders can add the Relative Strength Index (RSI) indicator to trade the Bearish Engulfing candlestick pattern. The RSI is probably the most popular trading indicator, and it’s also pretty useful.
The RSI is mainly used as a tool to pinpoint oversold and overbought levels. We have shown many examples of to trade the RSI on our landing page of multiple trading strategies.
Can you trade Bearish Engulfing Candlestick Pattern with MACD?
Yes, absolutely, traders can add the Moving Average Convergence Divergence (MACD) indicator to trade the Bearish Engulfing candlestick pattern.
The MACD is popular, and this is for good reason. For example, you can look at where the MACD is in relation to historical levels. For example, the Bearish Engulfing is often a continuation pattern (in the stock market), and it makes sense to trade in the direction of the MACD.
What is the difference between Bearish Engulfing Candlestick and Bullish Engulfing Candlestick?
The Bearish engulfing has a black body while the Bullish engulfing has a white body. The former has a close that is lower than the open, while the latter has a close that is above the open.
The chart below shows first a Bullish Engulfing (the first green arrow) and the second green arrow is a Bearish Engulfing.
What is the success rate of Bearish Engulfing Candlestick Patterns?
The success rate of the Bearish Engulfing candlestick pattern is between 55 and 65% (in the stock market). We found out by backtesting and statistics.
The success rate can be improved by adding another variable. However, the success rate should be measured in profits, not by looking at the win ratio. A trading strategy can have a low win rate, but big winners can offset those frequent losers.
How accurate are Bearish Engulfing Candlestick Patterns?
The Bearish Engulfing candlestick pattern is a pretty accurate pattern, but it also depends on other factors such as volatility, market conditions, and what other variables you are putting into your formula.
Can you improve the Bearish Engulfing Candlestick accuracy?
The Bearish Engulfing candlestick pattern can be improved by incorporating additional technical analysis tools and factors into the analysis, just like we did by adding the RSI indicator. you can, of course, add whatever oscillators you like, as long as it makes sense and increases reliability and profitability. You find out by backtesting to establish facts.
What is the win rate of Bearish Engulfing Candlestick Patterns?
The win rate for the Bearish Engulfing candlestick pattern is between 55 to 65%. We derived these numbers for the stock market, and it might vary if you are trading other markets and assets.
The win rate is an important tool as it normally reduces the risk of behavioral mistakes.
What are the disadvantages of the Bearish Engulfing Candlestick Pattern?
The main disadvantage of the Bearish Engulfing candlestick pattern is that it’s subjective, might lack clarity, has false signals, and is not suitable for every time frame. Let’s look at the disadvantages and cons in detail:
- Subjectivity and interpretation: Candlestick traders often use subjective interpretations of patterns, making it difficult to track performance. An inverted hammer is a candlestick pattern that indicates buying pressure followed by failed bear attempts to pull the market down, while a doji is a candlestick with a short body that denotes indecision. To increase trading performance, it is recommended to use quantitative analysis that rules out subjective feelings
- Lack of clarity: Also, when should you sell? Making it into a trade is just half the job. Even the best candlestick patterns need a clearly defined trading rule for when to sell. We recommend backtesting to get statistics and performance metrics.
- False signals: As indicated in another heading further up in the article, the Bearish Engulfing is pretty reliable. But that doesn’t exclude false signals – which is a part of trading (to accept losses). That is part of the game, and every technical analysis tool is the same. This is why you need additional tools to use together with the pattern!.
- Limited timeframe suitability: Choosing the right time frame is essential. What is the best time frame for candlesticks? The Bearish engulfing works best on daily bars – not weekly or monthly. Moreover, we believe it’s not very suitable for day trading, either.
What are the advantages of a Bearish Engulfing candlestick?
The main advantage of the Bearish Engulfing candlestick pattern is that it provides value if you are looking for bullish reversals – despite that it has “bearish” in its name. Let’s look at some other advantages and pros:
- Continuation indicator: After a rise in the market, the Bearish engulfing pattern works as a continuation indicator or pattern (as proven by our backtests and statistics).
- Confirmation with other indicators: If combined with other indicators, it has a good track record in indicating continuation. For example, the RSI indicator is a good trading tool for spotting oversold and overbought levels. Combined with the Bearish Engulfing, you have a potentially potent strategy.
- Buy and sell points: It is good at pinpointing entry and exit points and levels.
- Applicable to multiple time frames: The Bearish engulfing works best on daily bars, but can also be of significance on weekly bars.
- Simple to spot: The Bearish engulfing is pretty easy to spot on a chart, and it is also pretty easy to convert it into hard trading rules. It stands out due to its distinctively lengthy black body, and minimal to no upper and lower shadows, which helps traders spot probable bullish reversal opportunities (again, despite it’s called a bearish pattern).
What Is the Meaning of a Bearish Engulfing Candlestick Pattern?
The meaning of a bearish-engaging candlestick pattern is that it indicates a strong bearish sentiment and a potential trend reversal from an uptrend to a downtrend. It suggests that the bears (sellers) have taken control of the market and are pushing the price down.
How Can Traders Confirm Bearish Engulfing Candlestick Pattern Validity?
There are several ways that traders can confirm the validity of a Bearish Engulfing candlestick pattern:
a. Confirm with other technical indicators: The Bearish Engulfing pattern may be more reliable when it appears in conjunction with other technical indicators, such as moving averages or oscillators.
b. Look for a change in market momentum: The Bearish Engulfing pattern may be more reliable if a change in market momentum or price action, such as a break of a support level or a decrease in volume, accompanies it.
c. Check the context: The Bearish Engulfing pattern may be more reliable if it appears in a long-term uptrend or after a period of extended bullish activity.
How Can a Bearish Engulfing Candlestick Pattern Be Used in Technical Analysis?
A Bearish Engulfing candlestick pattern can be used in technical analysis to identify potential trend reversals and make informed trading decisions. It can be used with other technical indicators, such as moving averages and oscillators, to confirm the trend reversal’s strength and identify potential entry and exit points.
What is the Logic Behind a Bearish Engulfing Pattern?
The logic behind a Bearish Engulfing pattern highlights the shift in market sentiment from bullish to bearish during an uptrend.
How do you Interpret a Bearish Engulfing Pattern?
You interpret a Bearish Engulfing pattern, considering factors like the trend, candlestick bodies, and shadows for a comprehensive analysis.
How Can Traders Confirm Bearish Engulfing Pattern Validity?
Traders confirm the validity of a Bearish Engulfing pattern, including the use of other technical indicators, monitoring market momentum, and considering the context.