As we promised that in the 2nd part we will discuss the rest patterns [Bearish patterns], now it’s time to act. In this article, we will show you how Bearish candlestick patterns react in engulfing way.
What is a Bearish Engulfing Pattern?
A bearish engulfing pattern is a technical chart pattern that signals lower prices to come. The pattern consists of an up candlestick followed by a large down candlestick that eclipses or “engulfs” the smaller up candle. The pattern can be important because it shows sellers have overtaken the buyers and are pushing the price more aggressively down than the buyers were able to push it up.
Also Read: Engulfing Candlestick Patterns — [Part 1]
What Does the Bearish Engulfing Pattern Tell You?
A bearish engulfing pattern is seen at the end of some upward price moves. It is marked by the first candle of upward momentum being overtaken, or engulfed, by a larger second candle indicating a shift toward lower prices. The pattern has greater reliability when the open price of the engulfing candle is well above the close of the first candle, and when the close of the engulfing candle is well below the open of the first candle. A much larger down candle shows more strength than if the down candle is only slightly larger than the up candle.
The pattern is also more reliable when it follows a clean move higher. If the price action is choppy or ranging, many engulfing patterns will occur but they are unlikely to result in major price moves since the overall price trend is choppy or ranging.
Before acting on the pattern, traders typically wait for the second candle to close, and then take action on the following candle. Actions include selling a long position once a bearish engulfing pattern occurs or potentially entering a short position.
Example of How to Use a Bearish Engulfing Pattern
The chart example shows three bearish engulfing patterns that occurred in the forex market. The first bearish engulfing pattern occurs during a pullback to the upside within a larger downtrend. The price proceeds lower following the pattern.
The next two engulfing patterns are less significant considering the overall picture. The price range of the forex pair is starting to narrow, indicating choppy trading, and there is very little upward price movement prior to the patterns forming. A reversal pattern has little use if there is little to reverse. Within ranges and choppy markets engulfing patterns will occur frequently but are not usually good trading signals.
The Difference Between a Bearish Engulfing Pattern and a Bullish Engulfing Pattern
These two patterns are opposites. A bullish engulfing pattern occurs after a price moves lower and indicates higher prices to come. The first candle, in the two-candle pattern, is a down candle. The second candle is a larger up candle, with a real body that fully engulfs the smaller down candle.
Limitations of Using a Bearish Engulfing Pattern
Engulfing patterns are most useful following a clean upward price move as the pattern clearly shows the shift in momentum to the downside. If the price action is choppy, even if the price is rising overall, the significance of the engulfing pattern is diminished since it is a fairly common signal.
The engulfing or second candle may also be huge. This can leave a trader with a very large stop loss if they opt to trade the pattern. The potential reward from the trade may not justify the risk.
The Bottom Line
The last word I want to say that both patterns are needed to analyze the market. But if you feeling that you are out of capital, then forex no deposit bonus will be great. So, at least you have won both categories.