The Bearish Engulfing pattern is a strong sign of bearish reversal that is easy to spot but harder to trade. It can potentially help you profit.
How to trade the Bearish Engulfing Pattern
The Bearish Engulfing Pattern: a powerful sign of bearish reversal whose very name speaks of destruction. This pattern is one of the more easy to spot candle patterns but one tricky to trade because it is a contrary indication. When the market is trending higher, the thing to do is trade bullish signals, and a bearish engulfing pattern is not a bullish signal.
What exactly is a bearish engulfing pattern and how do you spot one?
First, this pattern forms when prices are in an uptrend and trading at or testing a high. The first candle will be white and may have upper or lower shadows. The second candle will form at or above the close of the first candle, it will be black and close below the first candles lowest point so it fully covers the first candle. Spotting one is easy: if prices are trading at a peak, an all time high or at a resistance point and a black candle forms that meets the criteria, you have an engulfing pattern.
What the engulfing pattern means is a change in trend. No longer are the bulls in charge, the bears have stepped in and now putting pressure on prices. What it doesn’t mean is an immediate reversal in prices, or even that prices will fall significantly. A change in trend could simply mean prices have entered a trading range which is why looking for secondary indications and waiting for confirmation in the candles before changing tactics. If you are long, this may be a good time to take profits.
Secondary indications are the signals you find in other indicators. In this case, I am using MACD for momentum and stochastic for trend and market health. If you notice, both the indicators in the chart below are diverging from the new high. Divergence is an indication of market weakness, slowing momentum and potential for reversal. It is a confirmation of the Bearish Engulfing Pattern, increasing the likelihood the trend is changing.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
In accordance with European Securities and Markets Authority’s (ESMA) requirements, binary and digital options trading is only available to clients categorized as professional clients.