Trading The Bearish Engulfing Pattern Like A Pro With Examples

Only the range of the engulfing candle needs to engulf the previous candle to be considered a valid pattern. MetaTrader 5 is a trading software platform that has gained popularity among investors engaged in forex trading and other financial markets. The stop loss can be placed below the recent swing low – which is the low of the Dragonfly Doji. The target (limit) can be placed at a key level that price has bounced off previously, provided it results in a positive risk to reward ratio. This can leave a trader with a very large stop loss if they opt to trade the pattern.

These are extremely easy to spot and traders on the lower time frames will see hundreds of these candlestick formations each day in high volume markets. The GBP/USD chart below gives us a solid illustration of how to trade this bearish reversal pattern. See below for guidance on how to trade the engulfing candlestick pattern observed on the GBP/USD four-hour chart. The key to building confidence when trading the bullish engulfing candle is to complement the candle formation with a supporting signal/indicator.

Trading Example:

When the bearing engulfing pattern appears at resistance, it provides greater conviction towards a bearish bias. Generally, engulfing candle patterns are very reliable, particularly for short-term trades. Many traders who utilize the scalping or day trading strategy often use the engulfing candle pattern to capture small price movements. Bullish and bearish engulfing candlestick patterns have a unique set of pros and cons. Practise using bullish engulfing candlestick patterns in a risk-free environment by opening an IG demo account. The bullish candlestick tells traders that buyers are in full control of the market, following a previous bearish run.

Notice on the image above, the bullish pennant pattern occurs after a sharp price move to the upside. Also notice how the bullish pennant pattern appears as a short symmetrical triangle. Can you see how the upper resistance trendline is sloping downward, while the lower support trendline is sloping upward? This creates a convergence of the two trendlines that will lead to a breakout near the apex point. A bullish pennant formation provides clues for a price continuation to the upside following the breakout. The confirmation of the breakout occurs upon a candle close above the resistance line of pennant pattern.

What Does the Bearish Engulfing Pattern Tell You?

It is a reversal pattern that suggests that considerable selling is likely to enter the market. In forex, 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. The GBP/USD chart below gives us a good look at the bearish engulfing pattern.

The bearish engulfing pattern implies an unexpected change of sentiment in the market. While initially, the market is moving up, affirming bulls in control, the second candle implies a different thing. While the second candle opens and gaps up, signaling that bulls are still in control, bears join the fray in volume and prevent bulls from pushing prices higher. We have a bearish engulfing pattern on the daily time frame at a swing high which broke a key level. Notice in the chart above how the bearish engulfing candle broke below one of the key levels. This gives us our third requirement, moving the pattern from a potential setup to a tradable setup.

Bearish Engulfing Pattern: Definition and Example of How To Use

In this regard, our goal is to identify price areas where the trading volume is flat. Discover the range of markets and learn how they work – with IG Academy’s online course. The larger the second candle is compared to the first candle, the stronger the bears have become.

These are the types of setups you will want to pay close attention to, as they will form as your bread and butter trades throughout your trading career. Hopefully you’ve had a chance to read through that trading lesson all about swing trading. As this will make this lesson today much more clear on the entry criteria. Harness past market data to forecast price direction and anticipate market moves.

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Now we’re starting to put this bearish engulfing pattern into context. Both levels are represented by highs and lows as well as several gaps. As I’ve mentioned in other lessons, these gaps often act as support and resistance. By the end of this lesson you will know the three things that are required to make these patterns “tradable”. This will allow you to trade bearish engulfing patterns in a way that will maximize your profit and reduce your risk. The bearish engulfing is one of the most widely used candlestick patterns by traders.

When viewed within a strong trend, traders can glean information from the candle pattern pointing towards continued momentum in the direction of the existing trend. The image below depicts the bullish engulfing pattern appearing at the bottom of a downtrend. The first candle will depict the end of the established trend strength. It should be noted the size of this primary/bullish candle can vary but it is crucial that the body of this candle gets completely ‘engulfed’ by the candle that follows.

Types of Forex Engulfing Patterns

Of interest is the fact that the price tends to edge lower every time it comes closer to the MA. The chart below shows a bearish engulfing candle pattern appearing https://g-markets.net/ at resistance on the US Dollar Index (DXY). The level of support is important here because it shows that movements higher have been rejected previously.

• The pattern alone isn’t enough of an edge to trade the markets profitably or successfully over the long term.
• In terms of the market sentiment, it’s the only reliable source because the best technical indicators are all based on price action.
• Aggressive traders trade the engulfing pattern as soon as the previous candle is engulfed.
• Join thousands of traders who choose a mobile-first broker for trading the markets.
• Essentially, you bring your top positions stop losses in, reducing risk, then add that risk back into the market with a new position when a bearish engulf entry signal appears.

A bearish engulfing pattern is a technical chart pattern that signals lower prices to come. The pattern consists of an up  (white or green) candlestick followed by a large down (black or red) candlestick how to trade bearish engulf forex that eclipses or “engulfs” the smaller up candle. However, in the forex market where the volume figures are not really available, we can use momentum indicators to gauge the strength of the breakout.

Technical Analysis Using Pennant Chart Pattern

What happens is that the buyers who got tricked to enter the bullish engulfing pattern are now trapped inside a consolidation zone. This is because it shows what the minimum price someone is willing to accept in exchange for an asset at that given point in time. So, if the current uptrend does reverse, you can see a clear exit point for your position. The pattern affirms renewed selling pressure with bears overpowering bears and succeeding in pushing the price lower. Once the pattern forms, one might consider selling opportunities below the engulfing candlestick, with the high of the candle acting as the stop loss order level.