The Bearish Engulfing pattern forex trading strategy is a bearish forex reversal candlestick pattern.
In this post, you will learn:
- what a bearish engulfing pattern is and what it looks like.
- how to trade bearish engulfing patterns
- the best places on your chart to trade bearish engulfing patterns
- The Selling Rules
- The Advantages and Disadvantages of Trading Bearish Engulfing Patters
Let’s get started…
What Is A Bearish Engulfing Pattern?
A bearish engulfing pattern is:
- a two-candlestick pattern. The first candlestick is bullish, but the second candlestick is bearish and this bearish candlestick “engulfs” the first candlestick. In other words, the high and the low of the second candlestick overshadow the first candlestick.
- it is one of the 12 forex reversal candlestick patterns mentioned on this site and as the name says, it is a bearish candlestick pattern so you need to be looking for in when price is in an uptrend. And if and when you see it, it means that the bulls and losing steam and the bears may be winning which can eventually lead to prices falling.
How To Trade Bearish Engulfing Patterns
- The first step in trading bearish engulfing patterns is to know what the pattern looks like.
- And the second step in the process is to evaluate whether the bearish engulfing pattern is forming at the right location so a trade can be made. You see, not all bearish engulfing patterns are created equal. If you see a bearish engulfing pattern in a downtrend, forget it, it makes not sense to trade it. Also, if you see a bearish engulfing pattern form in an uptrend, forget it if it does not form at a location of significance.
- Once a bearish engulfing pattern forms in a location of significance, then trading is is simply by the use of sell stop order or some trades may enter at market order. I will explain below with the exact trading rules on how its done.
The Best Places on Charts To Trade Bearish Engulfing Patterns
You need to analyze your chart to find out in advance where price may reverse down from. This is the very important step in trading bearish engulfing patters as well as trading other reversal candlestick patterns.
In other words, you need to identify levels where price is likely going to hit resistance and reverse down from.
As you can see in the above chart, price hit a resistance level, formed a bearish engulfing pattern and reversed down from.
Apart from the normal resistance levels which can be easily identified on your chart, you should also keep an eye out for:
- support-turned-resistance levels
- fibonacci retracement resistance levels
- downward trendlines also provide resistance levels
There are the levels that you should be aware about when looking for bearish engulfing patterns.
The Trading Rules (Selling Rules)
- Place a pending sell stop order 1-2 pips below the low of the 2nd bearish candlestick
- place stop loss 2-10 pips above the high of the 2nd bearish candlestick
- for take profit, look for previous levels below where price reversed up from…these are called previous swing lows and you can use them as take profit target levels or use risk:reward of 1:3. For example, if your stop loss is 20 pips and aim for a profit 3 times that, which would be 60 pips.
- Or if you think that price will continue down for a very long time, why not just trail stop your trades and not put a take profit order? In that way, if price moves 400 pips, you milk most of that trendy move downward anyway…its really up to you!
Advantages of The Bearish Engulfing Pattern Forex Trading Strategy
- the pattern itself, when formed in the right location, shows you a very drastic change in sentiment of bulls and bears. It tells you the bulls are losing steam. Why? Because, the first candlestick was bullish and all of a sudden, the second candlestick shows a completely different story where there was serious fighting going on between bulls and bears resulting in a big win by the bears. When you see such form in levels of resistance, you should really take notice as big price moves can happen that go for 100s of pips down!
- it is a very simple pattern to identify. If you find it hard, then use this reversal candlestick pattern indicator mt4.
- trading rules are really simple to follow
- trading larger timeframes like the daily and the 4hr, there’s potential to make 100 pips plus in profit per trade when the trade goes right.
- if you have a day job and involved in forex trading, why not use the daily timeframe, quickly scan your charts for bearish engulfing pattern setups, place a trade and go to work and check later during that afternoon when you get back home to see if the pending order was activated or not and manage it accordingly?
Disadvantages of The Bearish Engulfing Pattern Forex Trading Strategy
- sometimes the 2nd bearish candlestick is very very long. Which means that stop loss distance is going to be HUGE. When I see such, I often ignore it and wait to see if price will rise up into the “Bearing Engulfing pattern zone” and if it does so look for other bearish reversal candlesticks (usually in the much smaller timeframes than the one the bearish engulfing pattern formed on) and sell there. This is just to make sure my stop loss distance is not too big. But if that does not happen, there’s always another day or another setup that can happen in another currency pair. So move on.
- In the forex market, Fundamental drivers and news can destroy perfect trade setups… Let me explain with an example: A bearish engulfing pattern can form in a perfect resistance level on your USDJPY chart and you take the sell trade and it is working out as anticipated but then a fundamental forex news like an interest rate increase for USD is announced by the Federal Reserve. Guess what will most likely happen then? USD will rise. This means your stop loss will be hit.
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