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How Reliable Is Bearish Engulfing Pattern?

How reliable is a bearish engulfing pattern? This question is being asked daily by candlestick traders. Are you new to candlestick trading, wondering if trading a bearish engulfing pattern could make you a profitable trader and investor? If so, then you are in for a good treat.

In this blog post, we will discuss one of the most traded candlestick patterns (Bearish engulfing pattern). We will talk about candlestick patterns, what a bearish engulfing pattern is, how to identify a bearish engulfing pattern, the benefits/risks, and how to trade a bearish engulfing pattern.

Table of Contents

Introduction

The bearish engulfing pattern is a candlestick chart pattern that is used by traders to predict reversals in trends. The pattern is created when a large black candlestick engulfs a small white candlestick, and it is considered to be a bearish signal.

What are candlestick patterns?

Candlestick patterns are a type of trading indicator used to predict or track the performance of a financial instrument. Candlestick patterns are used to identify patterns in price data, which enables traders to make better trading and investment decisions.

The candlestick trading indicator is usually classified into two main categories, Bullish and bearish to be precise. The bullish candlestick pattern when applied in currency, commodities, or stock trading implies that the price of a commodity is likely to reverse if spotted in a bearish market, while the bearish candlestick pattern indicates a bearish reversal if identified in a bullish market.

What is a bearish engulfing pattern?

The bearish engulfing pattern is a reversal pattern that typically shows up when buyers rush in to buy currencies, commodities, or stocks at a higher price, only to later sell them off at a lower price.

The pattern can be identified by the fact that the price of the currency, commodity, or stock that has just been purchased falls rapidly toward the lower price at which the security was sold. This happens often because buyers believe that the financial instrument will continue to experience a strong decline and that the price of the stock will go up in the future.

So, how do you identify a bearish engulfing pattern?

A bearish engulfing pattern is a type of candlestick pattern that can be used to signal a potential reversal in the price of a security. The pattern is composed of two candlesticks, the first of which is typically a small, bullish candlestick followed by a larger, bearish candlestick.

How reliable is bearish engulfing pattern?
Bearish engulfing by Chikwem Chinedu Ogugua on Tradingview

The bearish candlestick should “engulf” the body of the bullish candlestick, meaning it should be larger in both price and volume. For you to easily identify a bearish engulfing pattern in a financial market, it requires a little but consistent practice.

However, The best practice is to look for a potential area of support and resistance level. the support and resistance level are the areas on our chart where the price of a financial instrument stalls for some time as a result of economic events.

What are the benefits of trading a bearish engulfing pattern?

Trading a bearish engulfing pattern in the financial market has several benefits which range from helping you to identify reversals in the market to making a good trading decision.

However, when trading a bearish engulfing pattern, you are essentially signaling to your market that you do not believe that the price will move in a certain direction and instead are hoping for a technical reversal.

This can be a very profitable strategy, as you can make a lot of money by buying the stock that reverses back to its original price. Another advantage of trading a bearish engulfing pattern is that it can help you identify when the market is overvalued to a possible reverse depending on the type of market condition you are trading.

What are the risks of trading a bearish engulfing pattern?

While trading a bearish engulfing pattern can be very profitable, it also has some potential risks attached to it. There are a few risks of trading a bearish engulfing pattern.

The first risk is that the market might break out of the pattern. The second risk is that the market might enter a new bullish phase, which could lead to a loss or profit depending on your bias(long or Short).

So, how reliable is the bearish engulfing pattern?

The bearish engulfing pattern is a two-candlestick reversal pattern that occurs at the top of an uptrend. It is considered to be a reliable reversal pattern, but there are a few conditions that need to be met for it to be valid.

How reliable is bearish engulfing pattern?
Bearish engulfing by Chikwem Chinedu Ogugua

The first condition is that the pattern must occur after a sustained uptrend. The second condition is that the first candlestick must be a small bullish candlestick that is engulfed by a large bearish candlestick.

The third and final condition is that the bearish candlestick must close below the midpoint of the bullish candlestick. If all three of these conditions are met, then the bearish engulfing pattern is considered to be a reliable reversal pattern.

How to trade a bearish engulfing pattern?

A bearish engulfing pattern is a two-candle pattern that can be found on a candlestick chart. This pattern is formed when the candlestick for the current day has a lower low and a lower close than the candlestick for the previous day. This pattern indicates that the bears are in control and that the price is likely to continue to fall.

To profitably trade a bearish engulfing pattern, You need to pay attention to the details of the entry and exit technique.

How reliable is bearish engulfing pattern?
Bearish entry by Chikwem Chinedu Ogugua

First of all, identify a bearish engulfing pattern and wait for the market to retest the close of the fully engulfed bearish candle. place a sell limit or use a market execution to place a sell order.

Place your stop loss using the wick of the bearish engulfed candle a few pips above your entry price level and finally set your take profit a few pips below your entry.

Bearish engulfing with stochastics

A stochastic oscillator is a range-bound tool, Meaning that it has a reading of between 0 and 100. This makes it unique as a useful indicator for overbought and oversold conditions, Reading over 80 is considered to be in the overbought range by traders while reading under 20 is considered oversold.

How reliable is bearish engulfing pattern?
Candlestick & stochastic by Chikwem Chinedu Ogugua on Tradingview

While trading bearish engulfing patterns can be traded alone, You can go the extra mile to incorporate stochastic trading indicators into your trading strategy to reduce the risk of losses and increase your chances of making profits.

In technical analysis, stochastic trading indicators enable you to measure overbought and oversold regions when trading an asset. Apart from being used to measure levels, it equally improves your entry and exit technique.

Conclusion

The Bearish Engulfing Pattern is a reliable pattern of a potential bearish reversal. However, like all technical indicators, it should not be used alone but rather in conjunction with other technical and fundamental analysis tools.

Do you have any questions or would like to share your thoughts on this topic? For the latest in candlestick trading, be sure to join our discussion forum to connect with your fellow traders and get tons of good opinions.

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