Bearish Engulfing Pattern

First day is a small bullish candle, second day is a large bearish candle

A bearish engulfing pattern is a two candlestick trend reversal pattern that follows an uptrend. The bearish engulfing pattern criteria are:

The first day should be a bullish candlestick, but can be a doji.
The second day candle is bearish and is taller than the first day’s candle.
The open and high of the second day should be greater in price than the first day’s close and the second day’s close and low should be less than the first day’s opening price.
The strictest definition of a bearish engulfing candlestick pattern necessitates that the real body of the second day be larger than the first day’s candlestick (including the upper and lower shadow).

Occasionally the bearish engulfing pattern is referred to as the three outside down pattern. The difference is the addition of a third bearish candlestick that closes below the low of the second day’s bearish candlestick.

Traits That Improve the Bearish Engulfing Pattern's Effectiveness

Nison, in his book Japanese Candlestick Charting Techniques (1991, p. 39) states that the following factors increase the likelihood that the bearish engulfing pattern is an important trend reversal indicator:

The first day candlestick has a very small real body and the second day candlestick has a very long real body.
Reasoning: After an uptrend, a small bullish candle appears showing that bulls are unable to push prices very much higher as they have been able to do previously. As a reminder, a small bullish candlestick shows bulls having less power compared to large bullish candlestick which shows bears having more power. Similarly, a large bearish candlestick that appears after an uptrend shows that bears are able to come back into the market and the bulls were unable or unwilling to stop this bearish assault. The longer the bearish candlestick is, the more powerful the bears were.
The bearish engulfing pattern takes place following a long uptrend or a rapid move higher.
Reasoning: It can be reasoned that after a long upward move, that most traders who are going to buy have already done so, this leaves fewer traders to buy and push the price higher. This is why a small bullish candlestick or doji is important as the first day in the pattern; it shows that bulls are getting tired. In contrast, explosive moves higher are often overbought and are vulnerable to reversals downward. The bearish engulfing pattern can signal that the move was too fast and too much and the trend is about to change.
Volume on the second day candlestick is very large.
Reasoning: Generally, high amounts of volume transacted on a large bearish candlestick indicates that there was a large turnover of shares throughout the day and that traders had to sell at the asking price of buyers, therefore decreasing prices were required in order to complete a transaction, this is very bearish. Clarifying this using the concepts of supply and demand, if there are more traders willing to sell their shares (ie more supply) and there are less traders willing to buy shares (ie less demand), then prices should fall, consequently creating a bearish candlestick where prices opened and fell during the trading day to close lower.
The real body of the second day is larger than candlestick height (including shadows/wicks).
Reasoning: Multiple small candlesticks show uncertainty. The appearance of a large bearish candlestick that is larger than the previous short candlesticks shows that the market has finally decided to move downward.
The bearish engulfing pattern occurs in an area of resistance.
Reasoning: Resistance is a historical area in which bears previously have come into a market to sell at a certain price level. If the bearish engulfing pattern occurs at this resistance price level, then a trader might feel more confident selling short because the resistance acts as yet another bearish confirmation that the trend could be changing.

Invalidated Bearish Engulfing Pattern

Nison (1994) states that the bearish engulfing pattern is no longer valid when prices close above the top of the bearish engulfing pattern which includes the upper shadows; in fact he states that the outlook turns from bearish to bullish (p. 78).

Bearish Engulfing Blended Candle = Shooting Star

a bearish engulfing pattern combined into one candle equals a shooting star

When combined into one candlestick, the first and second day of the bearish engulfing pattern look like a shooting star candlestick which is a bearish reversal candlestick.

Bearish Engulfing Pattern Confirmation of Resistance

chart showing a bearish candlestick falling off of a resistance line

The chart above of the Energy SPDR ETF (XLE) demonstrates how the blue resistance line acted as resistance for the high of the second day of the bearish engulfing pattern. Once the upper shadow of the bearish candle reached the resistance area, the bears took charge for the rest of the day. Confirmation of resistance plus the bearish engulfing pattern were a potent combination for the bears who took the ETF downwards for the next few months. The bearish engulfing pattern in this chart was a good example of the second day candle’s real body being larger than the entire first day candle. It was also good that the bearish candlestick on the second day was so large, showing much force behind the bearish move downward.

Bearish Engulfing Pattern Creating New Resistance

chart showing a the top of the bearish engulfing pattern acting as an area of future support

Nison (1994, p. 78) suggests that bearish engulfing patterns can become an area of resistance for future prices. The chart above of the Energy SPDR ETF (XLE) illustrates a bearish engulfing pattern with many solid traits: the first day candle is small; the second day candle is very large engulfing five candlesticks prior to it; and it occurs after a long, continual uptrend. After the bearish engulfing pattern, prices fall but after a week prices begin to trend back up until they reach a high equal to the high of the bullish engulfing pattern’s second day candle close. An aggressive trader could attempt to sell short at the price level established by the bearish engulfing pattern over 17 trading days prior. In the example above, the trader would have been rewarded with a profitable trade. It is noteworthy that the candlestick that approached the resistance was almost a bearish engulfing pattern in and of itself. The precise candlestick definition for that two candlestick pattern is the Dark Cloud Cover.

Bearish Engulfing Pattern 2nd Day High Volume Confirmation

chart showing that volume on the 2nd day of the bearish engulfing candlestick pattern exceeding volume before and after

Notice on the chart above of the Dow Jones Industrial Average ETF (DIA) how the second candle of the bearish engulfing pattern had the second highest volume of any of the day’s shown in the chart. It is important confirmation to see high volumes accompany the second day large bearish candlestick in the bearish engulfing pattern. This shows that bears were serious about selling that day. Also note that the two days prior to the pattern were very low volume and were very small candles. It can be inferred that bulls were running out of energy (small candlesticks) and weren’t interested at buying at these higher prices (low volume). The large bearish candlestick with high volume proved that the bulls had no energy left and prices subsequently wandered downward for weeks thereafter.

Source :-http://www.finvids.com/Candlestick-Chart/Bearish-Engulfing-Pattern/

Bearish Engulfing Pattern Trading Strategy Guide

Last Updated on January 3, 2020

Do you know why most traders lose money when trading the Bearish Engulfing pattern?
It’s because they treat them all the same!
Here’s the thing:
You can have two identical Bearish Engulfing patterns but, one is a high probability setup and the other is to be avoided (like how you run away from a stinky ol’ skunk).
Why?
Because you must pay attention to the context of the market.
I know that’s not useful (like telling a blind man to watch his step).
That’s why I’ve written this trading strategy guide to teach you all about the Bearish Engulfing pattern — so you can trade it like a professional trader.
You’ll discover:

You ready?
Then let’s get started…

What is a Bearish Engulfing pattern and how does it work?

A Bearish Engulfing Pattern is a (2-candle) bearish reversal candlestick pattern that forms after an advanced in price.
Here’s how to recognize it:

The first candle has a bullish close
The body of the second candle completely “covers” the body first candle (without taking into consideration the shadow)
The second candle closes bearish

And this is what a Bearish Engulfing Pattern means…

On the first candle, the buyers are in control as they closed higher for the period
On the second candle, strong selling pressure stepped in and closed below the previous candle’s low — which tells you the sellers have won the battle for now

In essence, a Bearish Engulfing Pattern tells you the sellers have overwhelmed the buyers and are now in control.

Don’t make this BIG mistake when trading the Bearish Engulfing pattern…

Here’s the thing:
Many traders would spot a Bearish Engulfing pattern and look to short the market.
Why?
Because you think a Bearish Engulfing pattern is a sign of weakness that the market is about to reverse lower.
Wrong!
I’ll explain.
Yes, a Bearish Engulfing pattern shows the sellers are in control — but it doesn’t mean the price is about to reverse lower.
Why?
Because in an uptrend, the price is likely to continue higher and not reverse because there’s a Bearish Reversal pattern.
Think about this…
A trend can last for weeks, months or even years.
Do you think the entire move will reverse just because of one reversal candlestick pattern?
Unlikely.
In fact:
If you look at the lower timeframe, a Bearish Reversal pattern is usually a retracement within the trend
Here’s what I mean…

So, what’s the lesson here?
A Bearish Engulfing pattern doesn’t mean jack shit.
If you want to know where the market is likely to go, pay attention to the trend and not the candlestick pattern.
Now you’re probably wondering:
“So what’s the use of the Bearish Engulfing pattern?”
Well, that’s what I’ll cover next.
Read on…

How to use the Bearish Engulfing pattern and profit from “trapped” traders

On its own, a Bearish Engulfing pattern is meaningless.
However, if you combine it with market structure (like Support & Resistance) — that’s where it really shines.
Here’s what to look for…

A strong rally towards market structure (like Resistance or swing high)
A Bearish Engulfing pattern that reverses at the highs

Here’s the idea behind it…
When the market rallies strongly towards a key level, many traders will think…
“The market is so bullish. Let me buy now and capture some easy gains!”
The next thing you know, the price does a 180-degree reversal at the highs and now this group of traders is “trapped”.
And if the price continues lower, it’ll trigger their stop-loss fueling further selling pressure (which a short trader can profit from).
Here’s an example:

Next…

How to “predict” market turning points with the Bearish Engulfing pattern

Here’s how…
A downtrend consists of a trending move lower, followed by a retracement, and then another move lower.
So, you want to pay attention to the retracement move towards previous Support turned Resistance.
Why?
Because that’s where selling pressure lurks that could push the market lower.
However, you can’t “confirm” if the price will reverse from that area because it could also break above it.
So that’s when you use the Bearish Engulfing pattern to “confirm” the sellers are in control — and the market is likely to move lower.
Here’s an example…

Pro Tip:
This technique works best in a weak trend. For a strong or healthy trend, you should go with the next trading technique…

The Moving Average and Bearish Engulfing combo

In a healthy downtrend, the market tends to stay below the 50-period Moving Average (MA).
So any pullback towards the 50 MA presents a trading opportunity to go short.
Here’s what to look for…

Identify a healthy trend with the price respecting the 50MA
Wait for a pullback towards the 50 MA
Watch for a Bearish Engulfing pattern to reject the 50MA

Here’s an example:

Pro Tip:
This technique can also be applied to a strong trending market (where the price respects the 20MA).

Bearish Engulfing Pattern: 3 trading hacks that increase your winning rate

Now…
If you want to take your trading to the highest level, you must understand the nuances of the market.
So, here are 3 questions to ask yourself whenever you’re about to trade a Bearish Engulfing pattern…

How did the price approach a level?
Is the price rejection strong or weak?
What’s the market structure on the lower timeframe?

I’ll explain…

1. How did the price approach a level?

Warning: This is an advanced trading concept so please pay attention.
When you’re trading a reversal, you want to see a strong momentum move into a level.
Here’s why…
When you get a strong momentum move lower, it’s because there isn’t enough buying pressure to hold up the prices — that’s why the price has to decline lower to attract buyers.
Now the entire “down move” is called a liquidity gap (a lack of interest) since not many transactions took place on the decline.
This means the market can easily reverse in the opposite direction due to a lack of interest around the price level.
That’s why you often see a strong move down into Support, and then BOOM, the price does a 180-degree reversal.
Here’s an example…

So remember, if you want to trade price reversals, always look for a strong momentum move into a level.

2. Is the price rejection strong or weak?

Here’s the thing:
When you’re trading the Bearish Engulfing pattern, you don’t want to see a weak price rejection at a key level.
Because it doesn’t convince you the sellers are in control.
This is what I mean…

Instead, you want a strong price rejection.
It’s so strong that the range of the Bearish Engulfing pattern exceeds the preceding candles.
An example:

See the difference?
When you get a strong price rejection at a key level, the market is likely to reverse lower.

3. What’s the market structure on the lower timeframe?

Now…
The reason why you want to watch the lower timeframe is that it shows you who’s in control.
For example:
A strong move into Resistance on the Daily timeframe is a series of higher highs and lows on the 4-hour timeframe.
Now imagine…
The price is at Resistance (on the daily timeframe) and you get a lower high and low (on the 4-hour timeframe).
An example…

What does it mean?
Well, it tells you the sellers are in control and the market is likely to reverse lower.
With this insight, you have a low-risk opportunity to short the market and ride the next wave down.
This is powerful stuff, right?

Conclusion

So here’s what you’ve learned:

The Bearish Engulfing is a reversal pattern that tells you the sellers are in control
Don’t trade the Bearish Engulfing pattern in isolation — you must take into consideration the trend, market structure, etc.
You can combine the Bearish Engulfing pattern with the market structure to identify high probability trading setups
The 3 hacks I shared with you will improve your winning rate (a strong move into a level, a strong price rejection, and a break of structure)

Source :- https://www.tradingwithrayner.com/bearish-engulfing-pattern/