The bearish engulfing pattern is one of the most powerful reversal signals in candlestick analysis. When this pattern appears at the top of an uptrend, it warns that buying momentum is exhausted and a downward move may begin. This guide will teach you how to identify, trade, and profit from bearish engulfing patterns.
What is a Bearish Engulfing Pattern?
A bearish engulfing pattern consists of two candles that form during an uptrend. The first candle is a small bullish (green) candle, followed by a larger bearish (red) candle that completely engulfs the body of the previous candle. This formation signals that sellers have taken control from buyers.
Pattern requirements: The second candle must open above the first candle's close and close below the first candle's open. The red candle's body must completely cover the green candle's body.
Identifying a High-Quality Bearish Engulfing Pattern
Not all bearish engulfing patterns lead to profitable trades. Here is what separates strong setups from weak ones:
- Clear uptrend: The pattern must form after a sustained upward price movement
- Resistance zone: Patterns at key resistance levels are more reliable
- Size matters: The larger the engulfing candle relative to the first, the stronger the signal
- Volume increase: Higher volume on the bearish candle confirms selling pressure
- No nearby support: Make sure there is room for price to fall before hitting support
The Psychology Behind the Pattern
Understanding why this pattern works helps you trade it with conviction:
What Happens During Formation
Day 1: Bulls push prices higher and close the day with gains. Optimism is high and traders expect continuation.
Day 2: The market gaps up at the open, exciting bullish traders even more. However, sellers emerge in force. Throughout the day, they drive prices down relentlessly, closing well below the previous day's open. Bulls who bought the gap up are now trapped and must sell, adding fuel to the decline.
Trading the Bearish Engulfing Pattern
Entry Methods
Choose your entry based on your risk tolerance:
- Aggressive entry: Short at the close of the engulfing candle. This maximizes profit potential but risks false signals.
- Conservative entry: Wait for the next candle to close below the engulfing candle's low. This confirms bearish momentum.
- Pullback entry: Wait for price to retrace to the engulfing candle's midpoint before entering. This improves risk-reward but you may miss some trades.
Stop Loss Placement
Place your stop loss above the high of the bearish engulfing candle. If price exceeds this level, the pattern has failed and you should exit.
Example Trade Setup
Stock ABC forms a bearish engulfing at resistance:
- Engulfing candle high: $125.00
- Engulfing candle close: $118.50
- Entry: $118.50 (at close)
- Stop loss: $126.00 (above the high)
- Risk per share: $7.50
- Target (2:1 reward): $103.50
Setting Profit Targets
Use these methods to determine where to take profits:
- Support levels: The next support zone below your entry is a natural target
- Risk multiple: Target 2x or 3x your risk amount
- Moving averages: The 50 or 200-day moving average often acts as support
- Previous swing low: Look left on the chart for previous low points
Best Timeframes for Trading
The bearish engulfing pattern works across all timeframes with varying characteristics:
- Weekly charts: Strongest signals for position traders. Indicates major trend changes.
- Daily charts: Ideal for swing traders. Provides clear setups with defined risk.
- 4-hour charts: Good for active traders. Balances signal quality with frequency.
- 15-minute charts: Suitable for day traders. More signals but lower reliability.
Ways to Trade Bearish Engulfing Patterns
You do not need to short sell to profit from this pattern:
- Short the stock: Borrow and sell shares, then buy back lower
- Buy put options: Profit from downward moves with limited risk
- Put debit spreads: Reduce cost basis while maintaining bearish exposure
- Exit long positions: Use the pattern as a signal to sell existing holdings
- Inverse ETFs: Buy ETFs that move opposite to the market
Common Mistakes Traders Make
Avoid these errors when trading bearish engulfing patterns:
- Trading in downtrends: The pattern must appear after an uptrend to be valid
- Ignoring the bigger picture: A bearish engulfing in a strong bull market may just be a pullback
- Tight stop losses: Placing stops too close leads to getting stopped out on normal volatility
- Not waiting for confirmation: Patience often improves results
- Ignoring volume: Low volume engulfing patterns are less reliable
Enhancing Accuracy with Technical Tools
Combine the bearish engulfing pattern with these indicators:
- RSI overbought: When RSI is above 70, bearish reversals are more likely
- MACD divergence: If price makes new highs but MACD does not, the trend is weakening
- Fibonacci resistance: Patterns at 61.8% or 78.6% retracement levels are powerful
- Bollinger Band touch: Engulfing patterns at the upper band suggest overextension
Analyze Your Pattern Trading Results
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Summary
The bearish engulfing pattern is a reliable reversal signal when traded correctly. Look for it at resistance levels after clear uptrends. Use stop losses above the pattern high and target logical support levels below. Combine with other technical indicators to improve your accuracy and always manage your risk properly.
Learn about the opposite pattern in our bullish engulfing pattern guide. For more reversal signals, check out the evening star pattern or three black crows.