A Bearish Engulfing pattern is a chart pattern that consists of a small green candlestick with short shadows or tails followed by a large red candlestick that eclipses or “engulfs” the small green one. As implied by its name, a bearish engulfing pattern may provide an indication of a future bearish trend.
Bearish Engulfing is one of the important bearish reversal patterns. It appears after an uptrend. It’s a two candlestick pattern. In this, a large red candle completely engulfs the preceding small green candle. Though it is not necessary for the red candle to engulf the shadows of the previous green candle, it should engulf the entire real body. Heavy volume on second day of the pattern creates higher probability of trend reversal.
The bearish engulfing pattern consists of two candlesticks: the first is green and the second red. The size of the green candlestick is not that important, but should not be a doji, which would be relatively easy to engulf. The second should be a long red candlestick. The bigger it is, the more bearish the reversal. The red body must totally engulf the body of the first green candlestick. Ideally, the red body should engulf the shadows as well, but this is not a requirement. Shadows are permitted, but they are usually small or nonexistent on both candlesticks.
Formation of Bearish Engulfing pattern
Bearish Engulfing Pattern is formed by the combination of two candlesticks. The first one is a rising green candle and the second is the reversal red candlestick.
The market is in an up trend. The price opens at almost low of the day and as usual the buyers continue to buy. At the end of the session the price closes almost at the top for the time period. This results in the formation of bullish green candle, which is the first candle of the Bearish Engulfing Pattern. On the next day or next time period the price opens above the high of the real body of the previous bearish candlestick. Buyers are making new long trades. Those who are already long in the market are also adding to their position. But the smart money creeps in and starts unloading their position to these ignorant buyers. As the supply increases the momentum decreases and the prices starts falling. As the prices fall the bulls are happy to buy more at a lower price. This facilitates bears to distribute more shares at higher price.
he supply continues to increase more than the demand, pushing the price down. As the new buyers are all in loss, they also start to sell their position to minimize their losses. Sensing the change in the trend, the old bulls starts booking profits in their long positions. As the bears continue to increase their short position, the price falls further and at the end of the session the price closes below the real body of the previous candle. This results in the formation of bearish red candle, which is the second candle of the Bearish Engulfing Pattern and it engulfs the real body of the previous candlestick.
Bearish Engulfing Pattern is a major bearish reversal candlestick pattern. They occur at the top of an up trend.
- There has to be a clear up trend, whether major or minor.
- The first candle is usually a green candle signifying an ongoing up trend and the second candle is always a red candle.
- The second day red candle’s real body engulfs the first day green candle’s real body.