Bearish Engulfing Explained & Backtested 2025
Since now our trade is in green now, we look at potential profit-taking areas. For instance, the first area is the immediate horizontal resistance at $1.1270, which offers the same amount of pips that we risk . Therefore, this doesn’t represent a great risk/reward ratio, but some traders would prefer to play it safe and close the trade here.
Similarly, how to trade bearish engulf forex trade bearish engulfing patterns when momentum indicators show overbought readings. Then, look for an engulfing pattern in the opposite direction on a lower timeframe. For instance, if the daily chart shows an uptrend but appears extended, look for bearish engulfing patterns on the 4-hour or 1-hour charts. Only take the trade if the reversal aligns with a potential correction or reversal on the higher timeframe. The bearish engulfing pattern occurs when the market appears to be in an uptrend as part of a long-term trend or a short-term correction.
- The primary components of both are vertical lines representing the price range, with horizontal notches or specific shapes (like the body of a candle) indicating open and close prices.
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- A valid bearish Engulfing pattern continues with a third candle , which breaks the body of the engulfing candle downwards.
- The image depicts a bearish Engulfing pattern and some rules to trade it.
- With this insight, you have a low-risk opportunity to short the market and ride the next wave down after trading an engulfing candle.
- Over the years that I’ve been trading this pattern, I’ve picked up or developed a few filters that help to qualify good bearish engulfing patterns.
In fact, the bullish engulfing candle usually represents the bottom of a downward trend in prices, after which the prices begin to show an uptrend. Both patterns derive their power from representing dramatic shifts in market psychology where control visibly transfers from one group of traders to another. The size differential between the candles matters—the larger the engulfing candle relative to the prior candle, the stronger the potential reversal signal.
What is the Engulfing Candlestick Pattern?
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- Candlestick patterns are an essential component of price action analysis.
- Understanding the differences helps you choose the right pattern based on market context.
- Similarly, trade bearish engulfing patterns when momentum indicators show overbought readings.
- The appearance of a bearish engulfing pattern after an uptrend suggests that the bullish or ascending momentum is weakening.
After the appearance of bearish engulfing candlesticks patterns, the price reversed down and began to actively decline. The bearish trend was stopped by two reversal patterns, the hammer and the inverted hammer. You need to analyze your chart to find out in advance where the price may reverse down from. This is a very important step in trading bearish engulfing patterns as well as trading other reversal candlestick patterns. A bullish candlestick shows a higher close than its open and is usually shown without color or filled in with a typically “positive” color such as green.
– Trading Engulfing Patterns using moving averages strategy
A bearish candle has a lower close than open and is usually colored black or with some other “negative” color like red. The essence of the engulfing candle entry pattern is that the second candle’s body covers the entire body of the previous candlestick. Of course, if both the body and wick of the first candlestick are covered by the engulfing candle, the signal is even stronger.
Talking of technical price patterns, if you’re struggling with your trading and could do with some pointers. On the above chart, take note of the bearish engulfing that is coming of the swing high in the market. It is also coming of a key level of broken support now acting as a resistance level.
TRADING REPORTS
The image shows another bearish Engulfing trade, which takes place after price interaction with a psychological resistance level. A rule of thumb is that an Engulfing trade should be held for at least the price move equal to the size of the pattern. This means that the minimum you should pursue from an Engulfing pattern should equal the distance between the tips of the upper and the lower candlewick of the engulfing candle. The best place for a stop loss order in an Engulfing trade is beyond the Engulfing pattern extreme. This would mean that if the Engulfing setup is bullish, the Stop Loss order should be placed under the lower candlewick of the engulfing candle. If the Engulfing setup is bearish, then the Stop Loss order should be located above the upper candlewick of the engulfing candle.