Trading with a bearish engulfing candle in forex

Candlestick patterns are widely used technical analysis techniques for predicting trends and finding potential points for entering or exiting the market.

One popular candlestick pattern is the engulfing candlestick pattern, which offers reliable signals, especially when you want to know if the price movement is almost reversing to another trend.

What is an engulfing candle in forex?

It is a long candlestick that appears on the price action, this candlestick is longer than the previous or the next candlestick. The candlestick has its opening and closing prices higher or lower than candlesticks on both ends. 

An engulfing pattern can either be bullish or bearish. If it is a bullish candle, it has the opening price at the bottom and the closing price at the top. A bearish candle is the opposite, the opening price is at the top, and the closing price is at the bottom.

For a candlestick to be an engulfing candlestick, its body has to cover the previous candlestick. The engulfing candlestick is more significant if its body covers until the wick of the previous candlestick. 

What is a bullish and bearish engulfing candlestick pattern in forex?

A bullish engulfing candlestick pattern consists of two candlesticks one large and one small. The first candle is usually smaller and is a bearish candle. Which means that it is red in colour or black in some candlestick charts. 

The second candle is the engulfing candle, a longer candlestick that is bullish and is either green or white. Since the second candlestick is bullish, its opening price is at the bottom, and it opens lower than the closing price of the bearish candle. It also closes higher than the opening price of the bearish candlestick. 

A bearish engulfing pattern has two candlesticks, the first is short, and the other is long. The first candlestick is short, and has is a bullish candle. The bullish candle is green or white and appears before the engulfing candlestick. 

The second candlestick is a bearish engulfing candle meaning it is either red or black on the chart. It is called an engulfing candle because it is longer than its predecessor. Since it is a bearish candle, its opening is at the top and is higher than the closing price of the previous candle. 

What does a bullish engulfing candlestick mean in forex?

It forms by opening at a lower price and closing at a higher price from the previous candlestick. It shows that the bulls have taken control of the market. It also tends to have a short wick to show the market might have closed when the prices are still moving higher. 

A bullish engulfing pattern usually forms at the bottom of the downtrend. It is a strong signal of a reversal of the trend, and traders can enter the market by going long. It also signals the continuation of the same trend. 

How do you identify a bearish engulfing candlestick?

To identify a bearish engulfing pattern, you have to know its structure, but there are a few tips to use when confirming it. 

The type of the candlestick 

The bearish engulfing candlestick is longer than an average candle. It is also a bearish candle, represented by a red or black candlestick colour based on the type of candlestick chart the trader uses. 

The closing and opening prices 

The bearish engulfing candlestick has the prices opening higher than the closing price of the previous bullish candle. It also has the prices closing lower than the opening price of the bullish candle. This candle looks like it has overshadowed the bullish candle before it. 

It forms in an uptrend 

The bearish engulfing candle can form at any point in price action, especially in a volatile market. However, if it forms an uptrend, it has more significance and is a strong signal that the prices are reversing to a downtrend.

The bearish engulfing pattern forms an uptrend at the peak of the prices. If you are unsure if it is a bearish engulfing candle, you can check the overall trend to see the price direction. If the prices were in an uptrend, the engulfing candle is a possible indicator of a downtrend. 

Forms of bearish engulfing candlestick 

The bearish engulfing candlestick pattern may form in two ways:

The bearish engulfing pattern 

It is the first and common variation of the bearish engulfing candle. It overshadows the previous candle, as discussed above. The bearish candlestick is visible as it is longer than the average candlestick. 

Two bearish engulfing candles

The second variation happens when a first short bearish candlestick opens higher than the closing price of the previous bullish candle. Another bearish candlestick forms longer than the previous one, then the opening price is the same as the short bullish candlestick. 

This second candlestick is longer and closes below the opening price of the bullish candlestick. It gets considered an engulfing candlestick because it is longer than the previous candles. 

What does the bearish engulfing candlestick signify?

Reversal of the current trend

If it forms when the price action is moving through an uptrend, it is a strong signal of an incoming downtrend. It shows that the market has more sellers than buyers. For forex traders who have open positions, it is a signal to close these positions and get ready to short sell. 

When the bearish candle closes lower than the opening price of the bullish candle, it shows pressure from the bearish market for prices to move lower. This candle is reliable when it has completely overshadowed the bullish candle. 

It has a stronger signal depending on the length of the bearish candlestick. The longer the bearish engulfing candle, the stronger the reversal signals.

Strength of the trend 

The bearish engulfing pattern is also a strong trend indicator. For example, if the price action is on a downtrend, and the bearish engulfing pattern forms on a pullback, it is a strong downtrend signal. It allows traders to confirm the downtrend formation. 

It is an exit signal

It is a crucial signal for trend traders or other traders who trade forex using trends. Traders with a long position on the current trend use the bearish engulfing candle as a signal to exit the market before the prices fall. 

How do you trade a bearish engulfing pattern?

The bearish engulfing pattern alone is not enough for traders to base their trading decisions on. Forex traders need to complement these signals with technical and fundamental analysis to profit from the bearish engulfing. There are a variety of technical indicators traders use to confirm the price direction. 

Using the bearish engulfing pattern to predict a reversal

It can form in any price chart and requires the trader to be keen when looking for it. The first step when trading any asset using candlestick patterns is to ensure you know the structure and formation of a bearish engulfing pattern. 

Ensure you practice trading with candlesticks to distinguish different candlestick patterns. The bearish engulfing pattern forms at any point. Make sure you are trading a strong trend reversal signal from its formation. 

The bearish engulfing candle should completely cover the bullish candle and form at the end of a trend to be viable. They can apply the trend indicators such as the moving average and the MACD to confirm the trend. 

Another technical indicator is the relative strength index. It has a scale from 0 to 100, where above 70 shows that the market is overbought, while under 30 is oversold. Traders should confirm if the bearish engulfing candle has a correct signal of the reversal. 

You can also use the support and resistance levels to evaluate the strength or momentum of the trend. If the prices break the support level with a bearish engulfing candlestick pattern it is safe to trade. It is also critical for traders to understand the timeframes, in which they can open positions. 

When the bearish engulfing pattern is a stronger signal in the weekly time frame than when it forms in the four-minute timeframe. It has reliable signals on a higher timeframe than the lower time frames.

Entry 

Traders can go short on the market by entering after a successful closing price of the bearish engulfing candle. It is a potential position, especially if you have confirmed the trend strength using the relative strength index. 

The relative strength index will help you identify if the market is overbought when above 70. It shows that the bullish market is growing weaker, and the bearish market is taking over. The formation of the bearish candlestick pattern confirms the reversal. 

Other traders prefer to enter the market when the prices have a retracement or pullback. A pullback happens on a downtrend if the prices break from the main trend, but return after a short spike.

When the bearish engulfing pattern forms, traders can enter the market before the market continues with the downtrend. 

Stop-loss level

Place the stop loss above the highest point above the opening price of the bearish engulfing pattern. The stop loss level should be at the highest point of the trend before the prices get reversed. It is crucial to place it in a strategic position to avoid getting stopped. 

Take/ target profit

The target profit is the lowest point where the prices hit before the uptrend starts. The choice of a take profit depends on whether the risk to reward ratio is positive. The target profit is crucial as it acts like a risk management strategy. 

Calculate how much risk they get exposed to on the trade and the possible profits with the same trade. The target profit is also critical to avoid trading based on emotions and making mistakes. 

Trading a strong trend using bearish engulfing candlestick

The bearish engulfing patterns can appear in the middle of the trend and do not signify its beginning. If the bearish engulfing pattern forms, it signals the trend will continue. When trading a trend using this pattern, it is crucial to apply the technical indicators. 

Traders can mistake the bearish engulfing candlestick formed on a retracement for a reversal pattern. They should ensure to confirm when the candlestick pattern forms on a retracement using the trend and momentum indicators. 

The entry position at a strong trend is when the trend has a pullback. The pullback depends on the type of trend formed. If it is an uptrend, draw the support and resistance levels and wait for the price to breakthrough. 

If it is an uptrend, the prices might break through the resistance levels and forms a bearish engulfing pattern. Enter the market when the prices trace back to the original trend. The stop loss is at the lowest point of the price action. 

The take profit should be at the point when the price action is at the highest price before the trend changes. A crucial factor to consider is confirming the trend before opening any trading position. The relative strength index and the momentum indicators should confirm the pattern. 

Another tip is that traders should ignore the bearish engulfing pattern if it forms on a lower time frame, such as the four-minute chart. The formation is insignificant in the lower time frame, but it is viable when it appears on a daily or weekly time frame. 

The bearish engulfing patterns can also form when the price action is at a consolidation phase. The consolidation phase means that the buyers and sellers are almost equal in the market. It can also form when the market is volatile. 

Traders can use support and resistance to confirm the trend. It is also crucial to use technical indicators at this point since the market is unpredictable. If the bearish engulfing pattern forms a long candle, the trend will reverse. 

Traders must be keen when identifying the bearish engulfing pattern when trading. They should also distinguish what the bearish engulfing pattern signifies on a price chart, whether the trend is strong or about to reverse. 

Tips to use when trading the bearish engulfing pattern 

Understand that the bearish engulfing pattern indicates that the sellers are taking control of the market. It means that they could push the prices lower. Ensure that you first confirm that the prices have been in an uptrend before you short the position. 

The bearish engulfing candle can also appear in the middle of a downtrend to signify that the trend momentum is strong. As a trader, identify which bearish engulfing pattern you can trade. 

The bearish engulfing pattern does not form a perfect pattern as you might expect. It can form at any point in the market, and the trader has to confirm the signals using technical indicators. Inexperienced traders should practice first identifying the bearish engulfing candle before trading it. 

Some traders use the 50 or a 20 Moving Average (MA) to predict when to enter the market. A strong downtrend tends to stay below the 20 or 50 MA. Forex traders wait for a retracement with a bearish engulfing towards the MA to go short. 

Use support and resistance levels when trading with the bearish engulfing candle. It enables you to see the price action clearly to tell when the bearish engulfing pattern gives a valid signal or not. It also assists traders to look at the breakouts that form a bearish engulfing, a strong entry position. 

The longer the bearish engulfing candlestick, the stronger the reversal signals. It is due to a smaller bearish engulfing that does not offer a reliable trading signal. It is why the trader has to ignore the smaller trading signals and aim for longer candles. 

It is also crucial to note that bearish engulfing candles may not be a reliable signal in a choppy market. A choppy market is when the price action is volatile, making it hard to identify a specific trend. The prices have swing lows and swing highs which makes it risky trading.

Although the bearish engulfing candle is a strong signal of a reversal, it is not reliable to make trading decisions based on it alone. The best way to ensure you have the right trading signals is to pair them with technical indicators such as momentum and trend indicators like the RSI and the MA. 

Ensure to place a stop loss and take profit when trading. The stop loss should be strategic such as the highest price on the opening of the bearish candle. Some traders prefer placing it a few pips higher than the resistance level. 

The take profit should also be within the support line. You can also calculate the risk to profit ratio before placing the take profit. The take profit and stop loss are crucial in case your predictions are incorrect, they help in limiting losses. 

If you are unsure if the bearish engulfing pattern is signalling a downtrend, wait for one more day to see the direction of the next candlestick formation. It will help to get a clearer picture of the direction of the trend. 

Benefits of the bearish engulfing pattern 

It offers a reliable signal of a potential pullback, especially if the market was in an uptrend. For traders that prefer using candlestick patterns, the bearish engulfing is a strong reversal signal to use as long as you confirm that it occurred after n uptrend. 

It can get applied with technical indicators to be a reliable strategy in any financial market. The bearish engulfing candle if applied alone, is not as effective as when applied with other trading indicators. 

Limitations of the bearish engulfing candlestick 

It is reliable if the trader has confirmed that it formed after an upward rally in market prices. It indicates its formation outside of these conditions, it might not be accurate. It makes it a specific indicator for a downtrend. 

Sometimes, its formation does not guarantee a downtrend reversal. It might signal a temporary pullback in an uptrend. Inexperienced traders can mistake it for a reversal and short the position leading to losses when the trend resumes its original course. 

The bearish candlestick pattern is frequent in the financial markets. It is insignificant when it forms on a volatile market even though the market might be in an uptrend. Forex traders need to be careful when using this candle to predict a reversal in a choppy market. 

The bearish engulfing candle might belong such that it pushes the stop loss further up. It increases the risks the trader is exposed to when trading the reversal. If you compare the potential profits to the risks, the risk is higher in such a trade. 

Bearish engulfing candlesticks don’t offer a price target. It makes it difficult when you want to place a price target or take a profit. Traders can use other methods to establish a target price, like calculating the risk to reward ratio. They can also use technical indicators to analyze the financial market. 

Conclusion 

The bearish candlestick pattern is a crucial technical analysis tool to use when you want to trade any financial market. When trading using this candlestick pattern, ensure that you know the overall price direction. 

Some candlesticks give a strong signal of reversals, and others help traders identify the potential places to enter or exit the market. There are many candlestick formations, but one of the widely used is the engulfing candle. 

It is a simple pattern to recognise in the financial market, and once you understand its formation, you can use previous price charts to identify it. The best way you can trade any financial market is by applying candlesticks patterns, as they help traders to make better trading decisions if they understand how to use them. 

Frequently Asked Questions