Bearish Engulfing Pattern: Day Trading Terminology
The Bearish Engulfing pattern is a chart formation where the small green candlestick is engulfed or covered by a big red candlestick. Basically, the pattern is opposite to the Bullish Engulfing pattern where the small red candlestick is eclipsed by a large green candlestick. This chart pattern helps to identify the future occurrence of a reversal from a bullish trend.
According to savvy traders, the chart pattern is known to accompany an uptrend in a stock thus signaling the reversal in its trend. This is a great pattern to know because when you see it forming you can look to either get out of your long position or start a short position to take advantage of the likely reversal in trend.
How the Bearish Engulfing Pattern works?
As said earlier, the Bearish Engulfing pattern starts to form when two candle sticks are combined. The first candlestick is the positive green candle while the second one is the reversal red candlestick. By now, you already know the different parts of a candlestick.
In an uptrend, the market prices may start at a low level which means buyers will begin to purchase different securities. At the end of the trading sessions, market prices may close at the top finally forming a bullish white candle. In trading, this helps to indicate the first candle for the Bearish Engulfing chart pattern.
During the next trading day, market prices would open above for the previous candlestick’s high but during the day prices would sell off and close below the previous days lows which would then create a Bearish Engulfing pattern.
Ideally you would want to take a short trade after the pattern is confirmed with a stop at the highs of the engulfing pattern. Also, you would want to see a pick up in volume on the engulfing candle which will also help confirm the reversal and increase the likelihood of the pattern working out.
By now, you already know that a Bearish Engulfing pattern helps to indicate a reversal which means a security has attained the upper limits of its value. As a result, the stock will experience a reversal in price trend and a great signal for entering a trade. You can use scanning software like Trade Ideas to help find these patterns in real time which takes away a lot of the time in searching for them.