In the study of Candlesticks, a bearish engulfing pattern is formed when a small bullish candle is accompanied by a large bearish candle that overshadows or engulf the previous candle. It demonstrates the weakness in a buying trend and pre-indicates a potential selling trend in the market. For instance, the buyers are exhausted and sellers are likely to enter the market.
Bearish Engulfing pattern
The Bearish Engulfing pattern is a two-candlestick pattern that consists of an up (white or green) candlestick followed by a large down (black or red) candlestick that surrounds or “engulfs” the smaller up candle.
Basically, the pattern gets its name because the second candle engulfs the first candle.
- There should be a definite uptrend in progress.
- The first candle must be a white (bullish) candlestick.
- The second candlestick must be black (bearish).
- The black candlestick must completely cover the white candle (i” engulf” it). This means that the top of the black candle’s body must be above the top of the white candle’s body, and its bottom must be below the bottom of the white candle’s body.
The market gaps up but then selling pressure appears and forces the price to fall so hard, that the candle closes lower than the previous up (white or green) candle.
This second candle signals a shift in sentiment and a trend reversal is likely.
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.
The larger the second candle is compared to the first candle, the stronger the bears have become.
- If the preceding uptrend is significant, the pattern will likely be effective.
- The higher the top and the lower the bottom of the engulfing candlestick’s body, the more powerful the pattern is.
Vincent Nyagaka is a Professional Trader, Analyst &. He has been actively engaged in market analysis for the past 7 years. He has a monthly readership of 100,000+ traders and has taught over 1,000 students since 2014. Vincent is also an experienced instructor and public speaker. Checkout Vincent’s Professional Trading Course here.