Introduction to Bearish Engulfing Pattern
In this module, we are going to discuss the Bearish Engulfing candle, which gives a very strong signal of a trend reversal (probably to downtrend). We'll show you what this looks like, its characteristics, and valid conditions for this candle.
In addition, we'll look at the psychology behind the Bearish Engulfing candle and discuss predictions for the future.
The first thing we want to discuss with you is what a Bearish Engulfing candle is.
During an uptrend, a large red candle completely engulfing the previous green candle's body is called a bearish engulfing pattern.
Bearish Engulfing Candle Anatomy
Characteristics of a Bearish Engulfing candle
| Feature | Character |
|---|---|
| Formation | The pattern consists of two candles. |
| Color | The first candle is green (bullish), and the second candle is red (bearish). |
| Real Body Position | The second candle's real body completely covers the first candle's real body. |
| Shadow | The shadows can be short for the second candle but may vary. |
| Shadow Proportion | The real body of the second candle is much larger than the first, making the shadows less important. |
| Range | The range of the second candle is wider and covers the range of the first. |
| Volatility | Increased volatility is seen in the second candle, showing stronger market activity. |
| Trend | Typically appears in an uptrend, signaling a potential bearish reversal. |
| Momentum | Momentum shifts from buying to selling, indicating a possible drop in price. |
| Symmetry | The second candle is much larger than the first, showing an uneven structure. |
| Volume | Higher volume often supports the second candle, confirming the strength of the reversal. |
Blueprint of a Bearish Engulfing Candle on chart
A Bearish Engulfing Candle occurs during an uptrend and indicates the possibility of a counter-trend, meaning a reversal to a downtrend.
Limitations of the Bearish Engulfing Candle
- False Signal: In volatile or choppy markets, a Bearish Engulfing candle can lead to incorrect trade entries.
- Dependence on Confirmation: This pattern often requires additional indicators or confirmation from price action to improve reliability.
- Movement: The Bearish Engulfing candle typically signals short-term bearish sentiment and may not indicate a long-term reversal.
- Market View: The pattern's effectiveness is influenced by the broader market context and prevailing trends.
- Limited Use in Strong Trends: Less reliable in strong upward trends, as the market may continue to push higher.
- Asset Variation: Success rates may differ depending on the financial instrument being traded.
- Point of View: Traders might interpret the Bearish Engulfing pattern differently based on their strategies.
- Volume Factor: Low trading volume can reduce the validity of the pattern, making it less effective without significant volume.
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