For all traders, the point at which the trend reverses marks one of the perfect trade entry points. At the peak of an uptrend, one of the popular candle patterns that signals potential reversal is the bearish engulfing pattern. It's easy to identify and very effective when trading trend reversals. Bullish and bearish engulfing candlestick pattern are popular and frequently appear on charts. Today we will focus on the identification and characteristics of the latter.
What is a bearish engulfing pattern?
Identifying the bearish engulfing pattern on IQ Option
In order to identify this pattern some conditions must exist.
- First, the trend must be an uptrend. This pattern develops when an uptrend is becoming exhausted signalling potential reversal.
- Second, the bullish candle must be smaller than the bearish candle that follows it. Note that the bullish candle must can be a doji. Dojis are easy to engulf.
- Third, the bearish candle must completely engulf the bullish candle. The longer the bearish candle, the more bearish the reversal will be.
The body of the first candle should be contained within the body of the second downtrend candle. This pattern usually forms at the peak of an uptrend when bears finally take over the markets.
Is bearish engulfing good or bad?
The thing with candlestick formations generally is that used as intended, they are quite good. Also, bearish engulfing patterns work well in trading. However, there are three things to bear in mind here:
- The pattern itself must be preceded by an upward movement. A pattern which looks like bearish engulfing and appears under other circumstances is NOT the pattern.
- On intraday charts, when prices move smoothly candle by candle the pattern and the pattern will look slightly different than on the chart. You will see this immediately on a live chart.
- Ideally, bearish engulfing occurs in some broader context, e.g. it occurs when the price reaches a resistance level.
How do you trade bearish engulfing pattern?
Below you can see a GBPUSD chart with a 15-minute time frame. The red horizontal line is the price resistance with which the price had already reacted several times before the bearish engulfing pattern appeared. I have marked the pattern itself with a yellow circle. See that on an intraday chart the opening price of a candle is usually very similar to the closing price of the preceding candle. This is because price changes occur quite smoothly, especially in liquid markets. Therefore, on an intraday basis, an engulfing pattern does not look as spectacular as it does on the charts.
In the chart below, however, the coverage is clear. The downside candle has a body more than twice the size of the first candle of the pattern. This dynamic indicates a change to a downtrend.
Once you encounter a bearish engulfing pattern, you must wait until the bearish candle forms confirming the start of the downtrend. Enter a sell position on your IQ Option account.
As you've seen, the bearish engulfing pattern is quite easy to recognize. If you notice an uptrend, simply follow it until the bears step in. Remember that this is a trend reversal pattern. So whenever you encounter it, enter a sell position.
Now head over to your IQ Option practice account and start trading using this pattern. Share your results in the comments section below.
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