Bearish and Bullish Engulfing Pattern Trading Strategy Guide

Having this first-principles approach to charts influences how I trade to this day. Most traders see a bullish engulfing pattern and they just go long blindly. Watch this video to learn how to identify and trade the bearish engulfing candle with real-time examples.

Now, let’s explore some strategy examples that demonstrate how combining engulfing patterns with other signals can improve your chances of success. With the resistance level slightly above, traders used the opportunity to enter sell positions with a stop loss order and placed a few pips above the previous high. While the pattern can occur anywhere, it tends to provide a much more accurate bearish reversal signal when it appears at the end of an uptrend affirming waning upward momentum. Determining the success rate of the setup in isolation is challenging since its effectiveness can vary depending on market conditions, timeframes, and other factors. The success rate of any trading pattern or signal is not fixed and can fluctuate over time. The BE- pattern formed at a key level on the chart, at the extreme of the BB, and as a reversal trade, against the longer-term uptrend.

The combination of these signals means the price has reached the local low, and one could enter a long trade. The appearance of a pattern in the chart signals an imminent trend reversal. However, engulfing requires additional confirmation from other technical indicators or candlestick patterns. A bearish engulfing pattern is a candlestick formation where the body of the current candlestick completely engulfs the body of the previous one. The highest probability setups typically form at key resistance levels. Bearish Engulfing Patterns, a staple of technical analysis, offer several advantages when utilized in algorithmic trading.

The reliability of the formation as a signal for a trend reversal depends on various factors, including the context in which it occurs and confirmation from other indicators or patterns. While it is considered a significant sell signal, it is not infallible, and false signals can occur. Several other chart patterns are like the bearish engulfing pattern, each with its subtleties and implications for trading. These include the bearish harami, dark cloud cover, the evening star, the shooting star, the three black crows, the tweezer top, the double top, and the head and shoulders chart patterns. The price was also nicely extended (at the bottom of the BB), so taking a long trade here would be considered a bullish trend-following trade. The Bullish Engulfing pattern is a candlestick pattern that can signal a reversal of a bearish trend in the market.

If it closes below the low of the Engulfing Candle, that’s your confirmation, and you may initiate a short position, setting your stop loss just above the high of the Engulfing Candle. The market had been in a downtrend but paused and made a higher low just before the Engulfing setup. My only concern here would be that the second candle was very long, meaning traders would require a large stop loss for the trade. Bollinger Bands are a technical analysis tool comprising three bands. The middle band is a simple moving average (SMA) that represents the intermediate-term trend of the stock, while the upper and lower bands are standard deviations of the middle band.

Difference between Bullish and Bearish Engulfing Patterns

In this lesson, you will learn what a bullish engulfing pattern is and how you can trade it for huge profits. You will also learn the three characteristics that must be present to make it tradable. Knowing these three things will help you maximize your profit potential and minimize your risk. Imagine you observe a Bearish Engulfing Pattern at the end of an uptrend. This candlestick, regardless of its size, is followed by a larger red candle that entirely eclipses the preceding candle.

Engulfing Candle When Trend Trading

1. The engulfing pattern is of Japanese origin, where candlestick technical analysis appeared in the 18th century on the rice exchange.
2. By the end of this lesson you will know the three things that are required to make these patterns “tradable”.
3. Of course, when I say clues, I’m referring to the formations that price action leaves in its wake.
4. Always consider the market context when trading Engulfing bar patterns.
5. This structured approach can optimize decision-making and improve trading outcomes.
6. A more aggressive entry is to enter immediately once the setup is complete.

Those clues often come in the form of candlestick patterns such as pin bars or inside bars. The bearish engulfing candle is one more clue we can use to identify a potential top in a market. A Bearish Engulfing Pattern is a recognized candlestick pattern used in technical analysis that signals a potential reversal from an uptrend to a downtrend in the financial markets. This pattern consists of two consecutive candlesticks, with specific characteristics that traders use to forecast bearish market behavior.

Engulfing bar patterns with support and resistance levels help confirm those levels and provide entries. The rules are similar to the first definition, except now I want a candle’s wicks to engulf the previous candle’s wicks. I still want to see a red candle followed by a green candle for a bullish setup or the other way around for a bearish setup.

Types of Engulf Candlestick Patterns

The result is price is pushed lower and eventually ends up closing how to trade bearish engulf forex much lower from the previous low of the bullish candle. The fact that the second bearish engulfing candle engulfs the bullish candle affirms that sellers have overpowered buyers and are likely to continue pushing the price lower. The reliability of the bullish engulfing pattern depends on factors, such as the timeframe, market conditions, and confirmation by other indicators.

This sets the stage for a bullish reversal, which is what the engulfing pattern indicates. However, keep in mind that the price could also be consolidating, forming a base for an upward trend. This strategy involves opening positions on a trend reversal after the pattern formation. Opening/closing a trade is carried out according to the rules of risk and money management.

1. The appearance of a pattern in the chart signals an imminent trend reversal.
2. A failed bearish signal could indicate underlying strength in the asset, and it isn’t the right time to go short.
3. The bullish engulfing pattern signals a potential trend reversal from a downtrend to an uptrend.
4. A position can be closed on the nearest support level or after a bullish reversal pattern forms in the area of longs.

You’re far better off trading only the setups that are confirmed by price action and working your way up to trading blind entries, if you so choose. This is now a high probability trade, meaning the success rate is well above 50%. Furthermore, the setup above gave us a chance at a 3R trade (23 pip stop loss and a 68 pip profit target). Notice in the illustration above, the engulfing candle’s range (high to low) completely engulfs the previous candle.

Understanding the Engulfing Bars in Trading

While the pattern is a bearish signal, it is prudent to confirm it with other technical indicators like moving averages or the RSI. A stop loss above the high of the engulfing candle is often placed to manage risk at this point. In the screenshot below, the stock was in an overall bullish trending environment and the bearish correction wave pullbacks were shallow and never reached the lower BB. The price formed two BE+ patterns right at the 20 simple moving average (middle BB) during the corrections. You can trade this pattern on all timeframes, but the most reliable signals are found on the higher timeframes such as the Daily and the Weekly timeframe.

So as soon as NZDJPY closed the day back above this key level, it began acting as new support. That said, patterns where only the range engulfs the previous candle can also be extremely effective and should not be ignored. First and foremost, know that the terms engulfing bar and engulfing candle are interchangeable. Yes, most traders accept the definition of an outside bar to be the same as an engulfing bar. I look for an established trend (higher lows for an uptrend or lower highs for a downtrend) and use Engulfing bar setups to enter in the direction of the trend.