The bearish engulfing candlestick pattern is considered to be a bearish reversal pattern. It forms usually at the top of an uptrend.
It consists of two candlesticks: the first is white and the second black. The size of the white one is not that important, but should not be a doji, which would be relatively easy to engulf.
The second candle in the pattern is the reversal signal. This candle comprises a long black candle. Ideally the high of this candle should exceed the high of the previous candle followed by the formation of a new low. The bigger it is, the more bearish the reversal. The black body must totally engulf the body of the first white candlestick. Ideally, the black body should engulf the shadows as well, but this is not a requirement.
It is very similar to the dark cloud cover pattern, but it’s more powerful, because the activity of bears is more tangible here, as the bearish engulfing pattern closes lower.
How to trade the bearish engulfing?
As it signals bearish reversal, you would want to enter short. Generally, there is no need to wait for a confirmation after this pattern, as the second bar already closes lower than the first bar or at least lower than it’s body. You can place your entry right at the open of the next bar.
In uptrend
Only trade in an uptrend if you believe firmly that the trend is about to reverse, based on fundamentals and/or other technical factors. It can produce false signals easily or can signal a minor pullback, where there is not a lot of opportunity. If you see strong divergence and the price also approaches resistance, those can be good reinforcement signs.
In downtrend
It makes sense to go short in a downtrend after a correction. If you can see the pattern appearing at a resistance level in a correction in a downtrend, that is a pretty strong signal. Trading the pattern without a correction or without any further signs, can be futile even in downtrend.
At support
Entering the market short in front of a major support level is not recommended. Better wait until the support is penetrated and the price pulls back.
At resistance
Strong resistance (such as popular moving averages, previous major lows, Fibonacci lines) above the pattern is a great reinforcement. The close of the second bar of the bearish engulfing should be below the resistance line.
How reliable is the bearish engulfing?
Not very. Our performance score is 4 out of 4, meaning it is among the weaker candle signals. Therefore it makes sense to look for several confirming factors when trading this pattern.
Bearish engulfing for stocks
If the volume of the stock in question is large enough and the timeframe is longer (e.g. daily), the bearish engulfing can be traded well, but only along with further confirming signals.
Bearish engulfing for forex
Choose longer timeframes and further signals to reinforce your trade entry if you want to trade the bullish engulfing in forex. Forget minute bars, that will produce a lot of false signals for you.
Bearish engulfing for Bitcoin
Always use other signals as confirmation, such as support levels. Bitcoin can produce relatively strong signals on larger timeframes, e.g. daily.
Others
We can say that the bearish engulfing is not the strongest candle formation, however combined well with other signals, it can give you a good entry point. The bullish counterpart of this pattern is the bullish engulfing candlestick pattern.
