How to Trade with a Bearish Engulfing Pattern Trade180 Technical Indicators

Conversely, the bullish engulfing pattern signifies a price rise, and is accurate only 55% of the time. This strategy is powerful in the sense that it can get us an early entry into a bearish chart pattern trade, as illustrated in our AUDUSD chart above. A bearish engulfing pattern appeared at the top of a Rising Wedge. After taking some profits at the lower trend line, our short trade gained more in profits as the wedge broke down toward its target.

• I’ve seen countless traders fall for its illusion of strength, only to get caught in the collapse.
• To trade bearish engulfing patterns well, traders need a clear strategy.
• The pattern consists of an up (white or green) candlestick followed by a large down (black or red) candlestick that eclipses or “engulfs” the smaller up candle.
• The pattern appears after forming a second peak, which represents trapped bulls—those who bought the first top now rush to exit, fueling the drop.

Interpreting the Bearish Engulfing Pattern

Another strong confirmation comes from a “gap down,” which means the opening price of a trading session is lower than the closing price of the previous session. Bullish and bearish engulfing candlesticks are a key part of technical analysis, often used to identify reversals in the price of an asset – commonly forex. Discover what engulfing patterns are and what they show traders. You need to analyze your chart to find out in advance where the price may reverse down from.

Over the years, I’ve learned that even the most textbook bearish engulfing pattern or three black crows can fail if the broader market context isn’t aligned. Here’s how I assess conditions before acting on any bearish reversal signal. The dark cloud cover candlestick pattern sometimes gets confused with the bearish engulfing pattern. The bearish harami and the bearish engulfing candlestick patterns are also highly similar. The only difference between them is the order of their candles.

Risk Reward Ratio and the Bearish Engulfing Bars

Understanding this pattern is crucial for those looking to navigate the markets with an informed perspective. Having traded since 1998, Justin is the CEO and Co-Founded CompareForexBrokers in 2004. Justin has published over 100 finance articles from Forbes, Kiplinger to Finance Magnates. He has a Masters and Commerce degree and has an active role in the fintech community.

• This will allow you to trade bearish engulfing patterns in a way that will maximize your profit and reduce your risk.
• Notice that the bearish candles become bigger and bigger with the progress of the price decrease.
• You should also make sure that the engulfing candle closes in the direction you want to trade.

We open a long trade at the Harami confirmation and we place a Stop Loss order below the lower candlewick of the first Harami candle. Initially, we aim for a price move equal to the size of the pattern. However, after accounting for two higher bottoms on the chart (first two blue arrows), we realize that this might be the beginning of a fresh bullish trend. The price action is telling us to ignore the initial target here. Having the two Harami candles on the chart are enough to say “Hey, this is a Harami pattern!

This general rule can be used only if your trade relies solely on the Harami pattern indicator on the chart. Usually, it is better to combine the Harami pattern with an extra indicator for getting a better probability and aiming for higher targets. This sketch briefly explains the structure of the two Harami reversal patterns. We added the arrows to outline the previous price direction and the expected outcome. It is important to remember which Harami pattern applies where.

Entry Techniques with the Forex Harami Patterns

When combined with a strong bearish reversal signal, like the bearish engulfing candlestick pattern, the odds of a reversal are even better. I’m updating this guide because the bearish engulfing candlestick pattern has become, by far, my how to trade bearish engulf forex favorite price action signal over the years. I’ve learned a lot about trading it since I first published this back in 2012, and I wanted to update it to reflect my most current information and experience. The bearish engulfing candle pattern is a key tool for traders.

Entering a Bullish Harami Trade

The bullish pattern is also a sign for those in a short position to consider closing their trade. The bearish engulfing pattern is the opposite of the bullish engulfing pattern. It forms when a small bullish candle is followed by a larger bearish candle that completely engulfs the body of the previous candle.

For example, on a daily chart, wait for the next candle to close below the engulfing candle’s low. HowToTrade.com takes no responsibility for loss incurred as a result of the content provided inside our Trading Academy. By signing up as a member you acknowledge that we are not providing financial advice and that you are making the decision on the trades you place in the markets. We have no knowledge of the level of money you are trading with or the level of risk you are taking with each trade. Here are the key takeaways you need to consider when using the bearish engulfing candle. Justin Bennett started trading in 2002, and let’s just say it was a bumpy ride.

Yes, several patterns, such as the Dark Cloud Cover and the Evening Star, similarly indicate potential bearish reversals and are valuable tools in a trader’s arsenal. This isn’t a classic pattern but is one of my more reliable bearish reversal signals. When price slices through a support level with nothing to the left—no prior price history—it’s often a one-way ticket south. The rising wedge is one of my favorite stealth setups—it masquerades as an uptrend but often ends in a brutal bearish reversal.

Knowing how to spot and use this pattern can make trading decisions better. This pattern means a shift from a bullish to a bearish market mood. Knowing about the bearish engulfing candle is important for traders. It helps spot bearish reversals and make smart trading choices. Technical analysis is the primary decision-making apparatus for legions of active traders. Accordingly, the bearish engulfing pattern is a popular element of countless reversal trading strategies.

Check out the backtest results to learn the best candlestick patterns for day trading. The bullish engulfing occurs frequently in all markets tested and supposedly portends a bullish reversal; however, history tells us otherwise. In all markets, the bullish engulfing tells us that volatility is incoming, and the best way to profit from this volatility is to use a bullish mean reversion trading strategy. So if we want to get history on our side, how should we trade this bullish engulfing pattern?