The Bearish Engulfing Candlestick Pattern (Backtest)

Last Updated on January 6, 2023

The Bearish Engulfing candlestick pattern 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;

Table of contents:

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:

Bearish engulfing candlestick pattern

If we zoom out such a pattern can take a form like this:

Bearish engulfing

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).

Click here to read more or order.

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 direction of the trend reversal is the main difference between a Bearish Engulfing candlestick pattern and a bullish engulfing candlestick pattern. 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?

When trading using a Bearish Engulfing candlestick pattern, the stop-loss order should be placed above the high of the white candlestick. 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 a Bearish Engulfing candlestick pattern cannot be accurately determined, 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 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.

More FAQs On The Bearish Engulfing Candlestick Pattern

Here are answers to some other frequently asked questions on the Bearish Engulfing candlestick pattern.

What Is the Meaning of a Bearish Engulfing Candlestick Pattern?

The meaning of a Bearish Engulfing 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.

Similar Posts