In this tutorial, we'll examine how the bearish engulfing pattern signals a price reversal after a bullish trend. We'll also discuss a detailed trading strategy tailored for this pattern.

• What is the Bearish Engulfing Pattern?
• Key Points of the Bearish Engulfing Pattern
• Identifying a Bearish Engulfing Pattern
• What the Bearish Engulfing Pattern Indicates to Traders
• Limitations of Using the Bearish Engulfing Pattern
• Effective Trading Tactics for Bearish Engulfing Patterns

A bearish engulfing pattern is a chart pattern that indicates lower prices are on the way. A green candlestick is followed by a big red candlestick that eclipses or "engulfs" the preceding smaller green candlestick in the pattern. The pattern is significant because it indicates that the sellers have surpassed the buyers and are aggressively driving the price lower than the purchasers were able to achieve.

The price rises until it reaches the first green candle in this arrangement. With the bulls in command, a towering red candle appears, opening higher than the first candle's body, signifying that the bulls still believe they are in charge of the realm. The bears then enter and push price lower, with it closing below the first day's body in a strong surge of selling pressure. The majority of the time, the price continues to fall.

• In turbulent markets, the pattern is far less important.
• What counts is the candlesticks' real body, or the difference between the open and close price. The down candle's actual body must swallow the up candle.
• Both candles should be large in comparison to the price bars around them. An engulfing pattern can be created by two extremely small bars, although it is significantly less significant than if both candles are enormous.
• A bearish engulfing pattern can appear anywhere, but it becomes more noteworthy following a market increase. This might be a pullback to the upside with a greater downturn or an upswing.

A green candle is lit first, followed by a red candle in this two-candle sequence. The body of the red candle is taller than the body of the green candle, and they overlap. That is, the red candle's opening price is equal to or higher than the preceding close, and the red candle's closing price is equal to or lower than the prior open. In terms of the bodies, either the tops or the bottoms can be equal, but not both.

Consider the following points to see if the candlestick pattern is 'bearish engulfing.'

• The market is on the rise.
• The first candle is a bullish candle with a short body.
• The second candle is a bearish candle, begins at or top the previous bullish candle and ends at or bottom of it.
• The second candle is a bearish candle with the body of the prior bullish candle entirely engulfed.

At the end of certain upward market rises, a bearish engulfing pattern can be noticed. The initial candle of rising momentum is overrun, or engulfed, by a bigger second candle, signaling a price change to the downside. When the open price of the engulfing candle is considerably above the close of the first candle, and when the closure of the engulfing candle is well below the open of the first candle, the pattern is more reliable. When the down candle is substantially larger than the up candle, it demonstrates far more strength than when the down candle is only slightly larger than the up candle.

Engulfing patterns are especially beneficial after a strong upward price advance since they plainly reflect a downward momentum change. The significance of the engulfing pattern is decreased if the price movement is choppy, even if the price is increasing overall, because it is a fairly typical indicator.

The enveloping or second candle might be massive as well. If a trader chooses to trade the pattern, this might result in an extremely big stop loss. The possible profit from the deal may not be enough to compensate for the risk.

Traders usually wait for the second candle to close before acting on the pattern, and then act on the next candle. When a bearish engulfing pattern appears, you can either sell your long position or enter a short position.

• Wait for the price to close lower the day after the engulfing pattern closes to confirm a reversal. That strategy works 95% of the time.
• When looking at the breakout direction, the candle frequently functions as a reversal. A downward breakthrough is likely.