Every trader has seen a red or black Japanese candle that engulfs the previous candle in the chart. Experienced traders and investors know this pattern as a signal for their investment. So, what does a bearish engulfing candle pattern warn us about when it emerges on a price chart? What should we do to open a successful trade?

This article covers the peculiarities of this candle pattern and explains how to trade a bearish engulfing candle pattern. If you seek independent advice, check out analytical materials by LiteFinance. Or try their easy-to-use smooth trading platform to practice leveraged trading on a free demo account using various instruments, such as futures, for example.

The article covers the following subjects:

What is Bearish Engulfing Pattern: Definition

A bearish engulfing pattern is a two-candle pattern where a bearish candle engulfs the previous bullish candle. A bearish engulfing candle pattern is a reversal pattern. It signals that bulls are losing buying pressure on the top.

Bearish Engulfing: Identification

Any beginner trader can identify a bearish engulfing pattern on a chart. A bearish engulfing pattern often occurs on the top, but it can also be identified lower. If the second red candlestick engulfs the first green or red candlestick, that’s a valid bearish engulfing pattern.

Also, note that only the real body is considered: the second candlestick’s body must fully engulf the previous candle’s entire body. The shadows do not matter at all.

What Does the Bearish Engulfing Pattern Tell You

Bearish engulfing patterns warn buyers that price growth is exhausted and the price chart will soon reverse down. If you see a market situation similar to the picture below, think about going short after you have additional confirmations.

The chart below shows a trend continuation pattern called “Three black crows” followed by a bearish engulfing pattern that itself consists of two patterns:

Such distribution of candles is called “Two crows” and signals a strong selling pressure. Once confirmed in a price chart, that’s a signal to open shorts.

Examples of Bearish Engulfing Patterns

Bearish engulfing candles appear on various time frames. These candle formations can be identified in any financial market, including the forex market. Below is a daily chart of the GBP/USD foreign currency, where a bearish engulfing candle appeared, and the price started to fall.

A bearish engulfing candle can also be identified in securities charts, for example, in the daily chart of Tesla stocks.

A bearish engulfing candle pattern also appears in the commodity market’s price charts, for example, Brent’s. You can open a profit-yielding trade with the lowest commodities futures trading commission in the long term.

Difference between Bullish and Bearish Engulfing Patterns

Bullish and bearish engulfing formations help forecast trend reversals or significant price pullbacks. These formations reflect market sentiment: you can notice with their help that the market stops after a directed price movement, and then the price goes in the opposite direction.

There can be two types of engulfing candles: bearish and bullish. A bearish engulfing pattern appears after a drastic price growth and signals a price reversal to the opposite direction on the top. A bullish engulfing pattern appears in the area of low prices after a downtrend and signals a trend reversal at the bottom.

Trading with the Bearish Engulfing Pattern

Most often, bearish engulfing formations appear in the securities, cryptocurrencies, commodities, and Forex market. Candlestick chart analysis can be combined with the Price Action trading strategy, which does not require using technical indicators.

Bearish Engulfing Pattern Trading Strategies

There exist many Forex trading strategies based on Bearish Engulfing Patterns. We will look at some of them in this section.

Strategy 1: Bearish engulfing in the area of high prices

The strategy implies opening short positions after a bearish reversal pattern appears on a strong resistance level. Let’s look at the daily chart of US Crude.

The picture below shows that the bulls failed to break through the key resistance level, and the first bearish engulfing pattern formed. Its peculiarity is a long red body after a short green body, which means the market participants fixed profits, and a bearish reversal occurred. The pattern formed on a strong resistance level, so a short position could be opened after a bearish engulfing pattern was fully completed. A position to sell could also be opened after a second bearish engulfing formation appeared. A position can be closed on the nearest support level or after a bullish reversal pattern forms in the area of longs. After a long fall, the price formed a bullish reversal pattern, “Hammer,” which signals the buyer’s pressure. The bulls broke out the resistance level, producing a signal to close positions.

Strategy 2: Trading a bearish engulfing pattern with confirmation

This strategy means that other candlestick patterns should confirm a bearish engulfing pattern on the top. Let’s take the USDCHF pair as an example.

The daily chart below shows that the price ran into strong resistance and began consolidating, attempting to break through. However, below that resistance level formed a bearish engulfing pattern, the first exit signal for the bulls that the market started moving into bearish territory.

When using this strategy, it’s important to wait until a trend reversal is confirmed. As seen in the picture, the pair formed the next candle — Hanging man — after bearish engulfing appeared. Another confirmation was that one more bearish engulfing pattern formed on the chart.

We could wait for the third signal in more conservative trading, but the hanging man pattern was enough to determine the next price movement. We could open a trade to sell after the hanging man pattern formed or after the second bearish engulfing pattern appeared.

Stop loss could be placed above or slightly below the resistance level based on the market entry point. Take profit should be placed on the nearest support level in that case.

Bearish Engulfing Potential Trade Entry & Sell Signals

To open a profit-yielding position, it’s enough to clearly determine support and resistance levels for the asset as a bearish engulfing pattern appears in the bulls’ resistance area, and its target is the buyer’s support level.

A trade can be opened in the resistance area after a bearish engulfing pattern and other candlestick patterns appear. The final target will be the buying area, i.e., the support level. Consider small time frames — 30 minutes and shorter — to find the optimum entry point. To identify support and resistance, you’d better use big time frames, from 4 hours and more.

Intra-day Bearish Engulfing Pattern

A bearish engulfing pattern can be used in long-term trading or intraday. Let’s find out how to trade intraday if this formation appears on a price chart.

For example, take the USDCHF currency pair. As seen on the two-hour chart below, the quotes reached the area of high prices — the selling area. The price consolidated near resistance at 1.0028, but the bulls failed to raise it further. A bearish engulfing pattern was formed. It includes two reversal candles: “shooting star” with a long upper wick and “hanging man” with a long lower wick.

Say, we opened a short position of 0.01 lots and placed a stop loss above resistance at 1.0061. Failing to break through resistance, the price reversed, as a bearish momentum candle suggests. When the price reached the support level, the trade closed in the positive territory with a profit of $35.13. The buying area was confirmed by a reversal Bullish Engulfing Pattern.

Bearish Engulfing trading tips

• First, it’s important to determine support and resistance levels on bigger time frames and find optimum market entry points on smaller time frames.
• An engulfing candle pattern forms in the area of high prices and is more valid when it appears on the top.
• A trend is likelier to reverse if the entire body of the second bearish engulfing candle is 2-3 times bigger than the first candle’s body.
• The pattern appears after a long uptrend or drastic short-term growth. In the latter case, the market is more sensitive to profit fixing, and the price can therefore drop as fast.
•  If the second candle appears amid growing trading volumes, a so-called blow-off occurs: the price falls sharply after an increase.
• Engulfing a few previous candles by a bearish candle is a clear-cut trend reversal signal, so we can open shorts.

Pros and cons of Bearish Engulfing Pattern

Like any candlestick analysis pattern, a bearish engulfing pattern has pros and cons.

Pros	Cons
The pattern is easy to identify on a price chart.	Clearer signals are produced only on the top on bigger time frames, from one hour and more.
The pattern clearly identifies price reversals and a stop loss level.	Smaller time frames can produce false signals because of market noise.
It’s easy to combine the pattern with other technical analysis indicators to confirm a price reversal.	Other candlestick formations are sometimes required to confirm the pattern.