Technical Analysis

Bearish Engulfing Candle Stick Pattern

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The ‘Bearish Engulfing’ is a two-candle pattern. The first candle will be smaller and green in colour. The second candle will engulf (entirely cover) the previous candle. It’ll be red and much larger in size.

If a stock is in an uptrend and the ‘Bearish Engulfing’ candlestick pattern appears on the chart – it is an indication that the stock price might reverse.

Bearish Engulfing Candlestick Pattern

Characteristics of Bearish Engulfing

  • The first candle in the pattern is of less importance. It’s usually small and green in colour.
  • The second candle is of more importance and this decides whether it’s a ‘Bearish Engulfing Pattern’ or not.
  • The price opens higher than the first candle and then falls. This creates fear of a further downfall, leading to more selling and the price falling further.
  • This creates a large red candle on the chart, which completely engulfs (covers) the previous candle. This pattern is called ‘Bearish Engulfing’.

Let’s take an example:

Reliance Industries opens at ₹ 2000 on the first day and closes at ₹ 2025. The price has gone up, so a green candle has formed on the chart.

On the second day, the price opens gap-up at 2050 and then falls. At the end of the day the price closes at 1975.

This creates a large red candle.

The combination of a smaller green candle, together with a big red candle is called the ‘Bearish Engulfing’ candlestick pattern.

Hope this is very clear.

Psychology of Bearish Engulfing Pattern

As the name itself suggests, the ‘Bearish Engulfing’ is an extremely Bearish pattern.

Its formation on the chart suggests the price at higher levels has been rejected and the subsequent fall in price is due to heavy selling.

It also suggests that the bears (sellers) have comprehensively beaten the bulls (buyers). And this trend could continue for some more time – as it always happens after an uptrend.

Bearish Engulfing Trading Strategy

Bearish Engulfing Trading Strategy

Remember, the main condition for ‘Bearish Engulfing’ candlestick pattern to work – is for a stock to be in an uptrend.

The last few candles have to be moving upwards.

After this, the ‘Bearish Engulfing’ pattern signals a trend reversal in the downward direction. However, when the pattern occurs on the charts, some traders wait for further confirmation.

If the next candle, after the ‘Bearish Engulfing’ opens in red, this is confirmation of reversal and a trade is taken here.

The stop loss is the high of the second red candle.

The example below should help you understand how to execute your ‘Bearish Engulfing’ trade.

Bearish Engulfing Example

The chart above is of ‘Hindustan Unilever Limited’ also known as ‘HUL’. It’s one of the top FMCG companies in India.

In October 2019, HUL was on an uptrend. The stock price was continuously rising.

In early November, a ‘Bearish Engulfing’ pattern was formed on the chart. From that day onwards, the trend reversed and the stock started falling.

For nearly two months, the downfall continued.

How a trader could’ve executed the ‘Trent’ trade based on the above chart:

  1. The ‘Green’ candle was formed on November 6th 2019.
  2. The ‘Bearish Engulfing’ pattern was completed on November 7th.
  3. A trader could’ve bought the stock at ₹ 2140 i.e closing price of the ‘Bearish Engulfing’ on November 7th itself.
  4. Or the trader could’ve waited for the confirmation on the next day. The stock opened gap down at ₹2135.
  5. The stop loss would be around ₹ 2190 i.e opening price of the ‘Bearish Engulfing’.

In the beginning, find these ‘Bearish Engulfing’ patterns on the chart. Take a few small trades. It could be just one share.

Keep a strict stop loss. If the stock hits the stop loss, take the loss and immediately exit the trade.

This real trading experience will give you new learnings. It’ll condition your mind to be comfortable with taking small losses when the rewards – on a correct trade – are bigger.

Not every trade will go your way. But when a trade goes as per plan, you need to increase your stop loss and learn to ride through the trend.

Taking real trades will also make you disciplined and build your patience. These qualities are important for a trade – and these are skills that cannot be gained by reading books or blogs.

You got to take real trades, make some money, lose some money and learn.

Good luck.

If you have any questions, feel free to ask in the comments section below.

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