In trading most traders use candlesticks as the default charting option. The reason is simple: candlesticks show a wide range of information. Including the open price, the close price, and the range in which the price has fluctuated within the candlestick. When choosing a 1 min time frame, each candle represents price movements per minute. Traders can choose between a wide range of timeframes but the idea remains the same.
Bearish Engulfing pattern definition
Bearish Engulfing is a Candlestick pattern. The pattern consists of 2 candlesticks and is considered to be a reversal pattern. Usually it appears at the top of an uptrend and reverses it.
Why is understanding Bearish Engulfing important for traders?
- Bearish Engulfing helps traders place orders against an uptrend.
- Bearish Engulfing can provide an exit signal when managing an already active long position.
- Bearish Engulfing is easy to spot and doesn’t require any indicators.
Thorough Bearish Engulfing Explanation
It takes 2 candlesticks for the Bearish Engulfing pattern to appear. The first one (in green or in white) takes the price higher. The second candle (in red or in black) is larger than the previous one and takes the price down. The second candle completely eclipses or “engulfs” the previous candle. The 2 candlesticks represent the battle between the bulls and the bears on the market. The bearish candle shows that the sellers take the initiative and the prices are likely to reverse.
Example of Bearish Engulfing in Forex
In Forex you will often notice the Bearish Engulfing pattern as you can see on the image. It’s important to keep in mind that patterns work better in larger time frames and the pattern is only considered ready to be entered once the second candle closes, and not while it’s still forming.
Furthermore, the pattern works better when the market shows a gradual uptrend. Choppy and highly volatile markets can produce a lot of false Bearish Engulfing signals.
The technical pattern doesn’t include fundamental analysis in its prediction and it’s always best to keep an eye on the market news while trading technically.
FAQs on Bearish Engulfing in Trading
How accurate is the bearish engulfing pattern?
Each market is different and it’s very difficult to say exactly how accurate the pattern is. However, you can test or backtest the strategy yourself to find the answers. Backtesting is pretty easy to do as the pattern develops at the top of an uptrend and reverses it. Each time the Bearish Engulfing is followed by reversal the pattern’s accuracy for that specific market increases. In addition, the pattern is more accurate in gradual, calm markets.
What does a bearish engulfing pattern indicate?
The Pattern indicates that sellers take the initiative in a bull market and it’s highly likely that the trend will reverse. Pattern is only complete once the second candle gets closed.