Bearish Engulfing Candlestick Pattern: Meaning, Example & Uses

What is the Bearish Engulfing Candlestick Pattern?

Candlestick patterns are an important aspect of technical analysis when it comes to understanding movements in the stock market. The candles can form a number of different patterns, including the bearish engulfing pattern, the shooting star pattern, and the piercing pattern. In order to predict market fluctuations, traders use these patterns as their cues. At the top of an uptrend, the bearish engulfing candlestick pattern emerges. It is a significant pattern since it indicates a change in the direction of price movement. Let's understand candlestick charts briefly before going on to the bearish engulfing pattern. Let's try to understand candlestick charts briefly before moving ahead with the bearish engulfing candlestick pattern.

Candlestick Pattern

Invented in Japan, candlestick charts use various colours to show price changes. The opening, closing, high and low prices for a specific interval are represented by numerous candles on a chart. A rectangular part of the candlestick known as the "real body" shows the difference between the opening and closing prices. On either end of the real body, two lines emerge. The shadow or wick lines indicate the highest and lowest prices for a given interval.

A down candle is coloured red when the closing price is lower than the opening price. On the other hand, the up candle is coloured green when the closing price is greater than the opening price.

Bearish Engulfing Candlestick Pattern

At the end of an uptrend, a bearish engulfing pattern develops, indicating a trend reversal. It suggests sellers will have a greater impact than the buyers, lowering the price. The bearish engulfing candlestick pattern consists of two candles. It is formed when a green or up candle is  followed by a red or down candle that completely overcomes or covers the up candle. A substantial shift in sentiment is indicated by the bullish engulfing pattern. The gap up at opening of the stock market is filled up and down candle engulfs the previous up candle to form the bullish engulfing pattern. Although it is seen as a bullish sign, the gap up quickly fills up because the bearish engulfing pattern indicates a reversal of trend. 

Trustworthiness of Bearish Engulfing Candlestick Pattern.

On a candlestick chart, patterns may not always appear as clearly as they do in theory. When the engulfing candle's opening is well above the previous candle's closure, a bearish engulfing candle is more reliable. it essentially denotes the existence of a huge gap upward. Additionally, the down candle's closing should be well below the up candle's opening. In a volatile market, the bearish engulfing candlestick pattern is  unreliable since it will result in the formation of numerous engulfing patterns with inadequate clarity. 

How to make use of a bearish engulfing candlestick pattern?

Trades usually take short positions after the emergence of bearish engulfing patterns. It is a potential sell signal for traders However, a trader has a variety of options in a real-world scenario. If the volume considerably rises as the engulfing candle is forming, this may indicate a stronger downward trend.

• When the engulfing candle forms, aggressive traders sell at the end of the day.
• A day after a bearish engulfing pattern forms, some traders wait for the trend to be confirmed. The need for it develops when the bearish engulfing candlestick pattern is not particularly strong.
• The majority of traders search for indicators other than the bearish engulfing trend such as price break. Combining the bearish engulfing pattern with other signs increases its credibility.

Conclusion

When used in combination with other technical analysis tools and followed by a trading day that confirms a trend shift, the bearish Engulfing candlestick pattern can be a highly helpful tool for projecting market direction. This pattern is simple to spot since it typically follows a prolonged upswing and engulfs or eclipses the previous day's bullish candlestick.