Bearish Engulfing is a type of bearish engulfing candlestick pattern. It is opposite to the Bullish Engulfing candle. This candlestick provides a clear signal of a bearish reversal in the market helping traders identify potential entry and exit points. In this article, Forex Trading will help you better understand the candlestick pattern. Includes identifying characteristics, meaning, and how to perform transactions. Let’s follow along!
General information about Bearish Engulfing candles
Bearish Engulfing candles are also known as candles. This is a strong signal of a bearish reversal. At the same time, it is also a useful tool to help traders determine market trends.
What are Bearish Engulfing Candles?
Bearish Engulfing is a pattern consisting of two candles with opposite characteristics and colors. The first candle is a bullish candle with a green color and a small body. The second candle is a strong bearish candle with a red color. It has a body that completely covers the previous candle.
Usually appears at the end of an uptrend or during the upward correction phase of a downtrend. The candlestick pattern shows strong execution from the sellers. At the same time, it predicts a reversal from an uptrend to a downtrend in the market. In this situation, traders can place sell orders to predict a new trend or close open buy orders.
Identifying characteristics of the Engulfing bearish candlestick pattern
In order not to miss the opportunity to trade with the candlestick pattern, traders need to accurately identify this pattern on the technical chart through the following characteristics:
Bearish Engulfing is a candlestick pair consisting of two candles with the following characteristics:
- The first candle is a green candle with a short body, the wick is not important. If this candle is reversal doji candlestick or Spinning top candle, the signal will be even stronger. Because it shows the indecision of both sides in the current trend.
- The second candle is a red candle, with a large body that engulfs the entire previous candle. It does not take into account candle wicks.
- The opening price of the red candle must be higher than the closing price of the previous green candle. At the same time, the closing price must also be lower than the opening price of that candle.
- Location of appearance: The bearish engulfing candlestick pattern can appear anywhere on the chart. However, it only provides a bearish reversal signal when it appears at the top of an uptrend. Or it could be in the corrective phase of the downtrend.
- The trading volume of the second candle is often very large.
See more: Read candlestick charts: Basic & advanced material
Meaning of Bearish Engulfing candlestick in Forex trading
Understanding the meaning of the bearish engulfing candlestick pattern will help traders apply it more flexibly during the trading process. Below are some important meanings of the Bearish Engulfing candlestick that traders need to keep in mind:
- Provide entry and exit points: when appearing at the top of an uptrend. Additionally, it may also be in the correction phase of the downtrend. To provide reversal signals from bullish to bearish. Traders can consider opening Sell orders or exiting open Buy orders.
- Shows market psychological developments: In addition to providing trading signals, also help traders grasp market psychological developments. In the first candle, the buyers still control the market and push the price according to the main trend. However, the second candle shows the dominance of the sellers and control of the market shifts to them.
Trading strategy with bearish Engulfing candlestick pattern
Below is a basic guide on how to open Forex trades using the Bearish Engulfing candlestick pattern. Aim to ensure safety and achieve maximum profits. To do this, you need to clearly define the points for opening orders, stopping losses, and taking profits.
Catch the market peak with the Engulfing bearish candlestick pattern
This way of placing orders carries a fairly high level of risk. Because you are trading short at the top of the market. However, if the price plays out according to the predicted scenario, profits can reach the maximum. You will place a SELL order when the price is in an uptrend and reaches the top, creating a bearish engulfing candlestick pattern as follows:
- Entry (Order opening point): As soon as the price completes the bearish engulfing candlestick pattern.
- Stop loss: Set at the highest point the price reached before turning down.
- Take Profit: When the price touches the old support level that was formed in the past.
How to trade the bearish Engulfing candlestick downtrend
This trading method offers a high degree of safety because the price is already in the trend. The important thing is that when a bearish engulfing pattern is created, it will reinforce the price’s downward momentum. You just need to patiently wait for the Bearish pattern to appear and then open an order. How to place a SELL order as follows:
- Entry (Order opening point): As soon as the price completes the bearish engulfing candlestick pattern.
- Stop loss: Placed at the nearest resistance level before the Bearish pattern formed.
- Take Profit: When the price touches the old support level that was formed in the past.
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The method combined with other Indicators
Furthermore, to increase the likelihood of success, traders need to combine the use of supporting signals from other technical analysis methods. For example MACD, RSI, as well as resistance levels. Because candlestick patterns are simply a reversal signal.
Combined with the resistance level
Combining the Bearish candlestick pattern with resistance levels is very effective. However, before applying, traders need to remember some important points. To determine a good resistance level:
- An effective resistance level is usually an even price (e.g., a good number). For example, with the GBP/USD currency pair, when the price touches the 1,400 level, then turns around. This shows that it is a reliable resistance level.
- That resistance level is not surpassed by any peak.
When the Bearish Engulfing pattern appears in this area and breaks through the resistance level, the bearish reversal signal is very strong and reliable. At this time, traders can open a SELL order right at the breakout point.
Use MACD line in technical analysis
The best method to trade using the MACD line is when a divergence signal appears. When investors notice that the price increases, it creates subsequent peaks that are higher than previous peaks. At the same time, the MACD line creates subsequent peaks that are lower than the previous peaks. This indicates that the price is moving away from the uptrend.
Creating a stronger reversal signal. Therefore, this is the ideal time to sell.
Conclude
All information from identifying characteristics, and understanding the meaning, to how to trade with Bearish Engulfing candles has been provided in detail by Forex Trading in the above article. Put this knowledge into practice to achieve more profits. Furthermore, don’t forget to comply with capital management rules and consider this a principle that should never be ignored.
Frequently asked questions
How to identify a Bearish Engulfing candle?
You need to identify two candles. In which the second candle has a larger body and covers the entire previous candle.
Where does the Bearish Engulfing candle often appear in the market trend?
Candles often appear at the top of an uptrend or during a bearish correction phase of a downtrend.
What factors can be combined with the Bearish Engulfing candlestick to increase the accuracy of trading signals?
Other trading signals that can be combined with candles include technical indicators such as MACD, RSI, and Fibonacci. As well as other candlestick patterns such as Pin Bar and Inside Bar.
