Bearish Engulfing Candlestick

In my experience, certain pin bars, i.e., the hammer and shooting star, are more reliable than just about any other single or multi-candlestick pattern. However, when used in the right way, trading the bearish engulfing candlestick pattern can be very fruitful.

Like many of the other candlestick formations that we have discussed, this pattern needs to be traded within the context of the market. Many price action traders use this pattern incorrectly, and consequently, many of them give up on this type of candlestick signal. I’d like to show you how to trade it correctly, so let’s start with the basics.

What is a Bearish Engulfing Pattern?

The bearish engulfing pattern is simply a candlestick that opens at or above the close of the previous candle (almost guaranteed in Forex), and then closes below the open of the same [previous] candle. Notice we’re talking about the real bodies here.

Trading the Bearish Engulfing Candlestick Pattern

For the most part, price action techniques are simple to understand. There may be lots of esoteric names to remember, which may or may not be important to you, but the concepts are pretty simple once you understand a few of these patterns. Like the shooting star, the bearish engulfing pattern is a strong bearish rejection of value – signified by the engulfing candle closing lower then the open of the previous candle.

In the example above, you will see a bullish price movement, followed by a bearish candle that engulfs the previous bullish candle. This pattern is confirmed at the close of the bearish engulfing candle. Never take a trade, especially based on candlestick patterns, that hasn’t fully developed (closed).

If you would have entered at the open of the next candlestick, and placed your stop loss above the high of the bullish price cycle (in this case, it is the high of our engulfing candlestick), you could have made a profit of about 2x your risk – assuming that you did not scale out of the trade.

This pattern gives extra confirmation when it engulfs another bearish price action signal, like a shooting star or hanging man (see the image above). In some cases, the bearish engulfing candlestick itself will be a shooting star, or another accurate candlestick signal.

In the example above, I would have taken the 50% entry of the shooting star candlestick. However, if you missed the shooting star signal, you could have still made a nice profit by trading the bearish engulfing candlestick pattern.

Often, the price action of a chart will offer you multiple confirming candlestick signals. In the image to the right, you can see three bearish engulfing patterns. Of course, only the 1st pattern came directly after a bullish price movement.

If price was previously in a strong bullish trend, these multiple confirmations could provide you with a strong indication that a trend reversal may be developing. If nothing else, these would have been nice to see had you entered the market after the 1st occurrence of this pattern..