The Bearish Engulfing Candlestick is a technical chart pattern, which helps traders to analyze impending price declines. A bearish engulfing candlestick occurs when a small (white/green) bullish candlestick precedes a large (red/black) bearish candlestick that completely engulfs the previous one. Bearish Engulfing Candlestick pattern is important as it helps traders to identify the situation where sellers have surpassed buyers, such situations cause a lowering of the price (down candle) more than what buyers could do (up candle) .

Traders use the bearish engulfing candlestick pattern as a signal to enter a short position or exit a long position. Traders also use additional fundamental research and technical analysis tools, such as trend lines, support and resistance levels, or moving averages, Relative Strength index etc. to validate the signal by the candlesticks and choose their entry and exit points for the trade

The bearish engulfing pattern consists of two candlesticks and signals a potential reversal from an uptrend to a downtrend in technical analysis. It typically occurs at the top of an upward price movement.

First Candle: The first candle is a small bullish (upward) candlestick, which reflects continued upward momentum.

Second Candle: The second candle is a larger bearish (downward) candlestick. This candlestick “engulfs” the body of the first candle, meaning it opens higher than the first candle’s close and closes lower than its open.

The bearish engulfing pattern signals that sellers have taken control and buyers are losing strength, suggesting that the price may start to fall, leading to a trend reversal

How to trade with Engulfing patterns

Bearish engulfing patterns often occur at the top of an uptrend. So, if you see a bearish engulfing pattern form after an extended uptrend, then this could be a sign that the trend is reversing and that you should take profits off the table.

Alternatively, you could also look to enter a short trade when you see a bearish engulfing pattern form. One way to do this would be to wait for the candlestick that forms the bearish engulfing pattern to close. Once it closes, you could then enter a short trade at the open of the next candlestick. Your stop loss would be placed above the high of the bearish engulfing candlestick.

In the image below, a series of higher highs and higher lows establishes an uptrend. After reaching a new short-term high (represented by the first candle in the bearish engulfing pattern), the price sharply declines, forming a strong and decisive bearish candle.

All the conditions align, and the bearish engulfing pattern forms. Afterward, the price continues to fluctuate with both highs and lows but trends downward overall.

This example clearly demonstrates the strength of a bearish engulfing pattern. The trend reversed after the second candle signaled that sellers had taken control, indicating the potential end of the uptrend.

In such cases, traders typically enter short positions, using the high of the second candle as a stop loss. The take-profit level is determined with the help of other technical indicators. For a more complete trading strategy, you may also use additional technical analysis tools, such as support and resistance or technical indicators. 

How to trade bearish engulfing ?.

1. Understand the Pattern:

• A Bearish Engulfing pattern forms when a small bullish (up) candle is followed by a large bearish (down) candle that completely engulfs the previous day’s price range.
• It typically signals a reversal in an uptrend, indicating potential bearish sentiment.

2. Conditions for Identification:

• Uptrend: The Bearish Engulfing pattern is most effective when it appears at the top of an uptrend.
• Engulfing: The body of the bearish candle must be larger than the body of the previous bullish candle, fully covering it.

3. Confirm the Pattern:

• Look for other confirming signals, such as overbought conditions in RSI (Relative Strength Index) or a resistance level.
• Volume spike on the bearish candle adds further strength to the signal.

4. Entry Point:

• Once the Bearish Engulfing pattern is confirmed, you can enter a short position (selling) after the price drops below the low of the engulfing candle.
• Conservative traders may wait for further confirmation, such as a close below a nearby support level or using technical indicators like moving averages.

5. Stop-Loss:

• Place your stop-loss just above the high of the Bearish Engulfing pattern to limit your risk.
• This ensures you’re protected if the trend doesn’t reverse.

6. Take Profit:

• Target the next support level or use technical indicators like Fibonacci retracement levels to identify potential profit zones.
• You can also use a trailing stop-loss to capture more profits if the downtrend continues.

7. Additional Confirmation:

• Combining the pattern with other technical indicators such as moving averages, or volume analysis and rsi divergence can increase the success of the trade.