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Bearish Engulfment Pattern Tips

The time has come to give a better understanding of the bearish engulfment pattern.  

What is a bearish engulfment, how to trade it, and what bearish engulfment  tips and tricks work. Those are the topics I will be discussing.  Let's get started.

What Is A Bearish Engulfment?

A bearish engulfment is a bearish candlestick pattern that occurs at a resistance level where the prior bullish candlestick bar that pushes the price onto the resistance is at least 50% erased by the subsequent bearish candlestick bar.

That occurrence at a resistance level that involves both a bullish and bearish candlestick bars is the bearish engulfment.

Where Does A Bearish Engulfment Occur?

Please allow me to bark about it a bit more.   Please ignore all bearish engulfment that do not occur at a resistance level.  It must take place on or near (on the edge) of a resistance level.

Usually, the price will rise for a while from a support level to a r√©sistance before the bearish engulfment appears. 

Note that the prior bullish candlestick bar is often created by the sell orders placed around the resistance.  Those orders attracts the price (cause it to rise first) onto the resistance like a magnet because the market makers must filled those orders.  

If those are serious sellers, the next candlestick bar will engulf the earlier bar.  That is exactly what has happened.  Bearish orders create bearish engulfment.

Should One Just Sell Because Of
The Bearish Engulfment?

Please do not trade like the old fashioned traders because the financial markets have evolved.  Never sell right away because of the bearish engulfment.  Use a different times frame trading technique. One may also check my article about how to sell like a pro.

The bearish engulfment is a reliable bearish trading setup.  One must apply the top-down trading tactics to avoid falling into a bullish trap.  In my opinion, it is always helpful to time the markets more precisely.

What To Do After One Spots Bearish
Engulfment?

If a valid bearish engulfment is completed, one must draw three horizontal lines.  

One line is at the high of the bullish candlestick,  the second line will be at the median line and third line at the low.  Those are the preliminary preparations before one begins to trade the bearish engulfment.
All those three lines are drawn on the bullish candlestick bar that has been engulfed.

One must also check the financials, economic news and perform the Google finance acid test.  The days of just using a bearish engulfment as the only excuse to sell are over.  The bearish engulfment is a warning that the price has a high chance to decline.  It will not continue to decline if there is no fundamental reason to sell.

I mean if those that have placed the orders to sell (who created the bearish engulfment) are not serious bears then the subsequent bearish momentum will quickly fizzled out, and the price will bounce up.

If one spots or scans for the bearish engulfment candlestick pattern, one can quickly put those stocks onto a bearish watch list. 

Warning

The bearish engulfment pattern is not completed until both candlestick bars are closed.  Both candlestick bars must close on the time frame one has spotted it.
Please do not fall into the trap of using an incomplete bearish engulfment candlestick pattern because it will not help.

Best Times Frame For Bearish
Engulfment

My favourite time frame for the bearish engulfment is the monthly chart.  I wish traders good luck when they are using times frame lower than the monthly chart.

I am not saying that bearish engulfment patterns on lower times frame are always unreliable.  Bearish engulfment patterns on monthly, quarterly and yearly charts are more reliable.  

I know that most candlestick patterns traders prefer the daily and weekly charts.  If one is trading a lower times frame bearish engulfment, one must check the specific higher time frame to validate it.
All trading setup must be validated without exception.

A bearish engulfment on the signal time frame constitutes a bearish signal. 

How To Trade Bearish Engulfment
Candlestick Pattern?

One must apply a top-down trading after one has drawn the three lines as I stated in the section subtitled what do to after one spots bearish engulfment.
It is a take off time, just do exactly what I have recommend in my article titled how to sell stocks like a pro.

A TSTW 24 day trader that spots a bearish engulfment on times frame higher or equal to 2H chart must switch to the first best time frame to take the trading signals and enter the trade.

A TSTW SYS 008 traders can switch to the signal after identifying a valid bearish engulfment on times frame higher or equal to the monthly chart.

Remember that both candlestick bars must close on that time frame.  If not wait.

The stop loss must be placed above the high of the bearish candlestick bar if one can afford it. 

As always, the first price target is the first and nearest support level.  Please secure gains or use a trailing stop.

Checklist For Bearish Engulfment
Traders

1/ Was the candlestick pattern at a resistance or on the edge?
2/ Do both candlestick bars close on that time frame?
3/ Have you drawn a line at the high, median and low of the bullish candlestick bar after the pattern is completed?
4/ Have you checked the corresponding higher time frame to validate the pattern?
5/ Have you checked the financials and perform Google finance acid test?
6/ Have you checked the economic news?
7/ Have you mapped out the chart on the specific higher time frame?
8/ Well, if the first seven checkpoints are ticked then one must wait for signal on the signal time frame using the top-down trading technique.
9/ On the day when one is about to enter the trade, be sure that the SP 500 is bearish if not wait another day.
If the trading signal fails, do not take the trade.

Good luck to all

Conclusion

The bearish engulfment is a powerful leading trading setup.  It will help those that are looking for leading trading signals.  All one has to do is to take time and learn to master it.  Use the checklist to avoid common bearish engulfment mistakes.

It is easy to spot it but the challenge is to trade it successfully.

Thank you for reading.  I hope this article is helpful to you.  Please share and bookmark it if you like it.  I will really appreciate it.

Please do not hesitate to post relevant questions and comments at Dayprotraders YouTube channel and in due course I will get back to you.

I wish you the very best.
Happy Trading To All

This article is written by
George Beaulieu
founder of Dayprotraders.com
website.