Understanding Bearish Engulfing: Reversal Pattern Signal on Candlestick

Bearish engulfing is one of the most important technical signals in candlestick analysis. This pattern forms when a bullish candlestick is completely engulfed by a much larger bearish candlestick, indicating a potential trend reversal from bullish to bearish.

Definition of Engulfing and Formation Conditions

Engulfing refers to a condition where the body of the previous candlestick is fully covered or wrapped by the body of the next candlestick. It is important to note that shadows (wicks) are not considered in this wrapping process. For an engulfing pattern to occur, two main requirements must be met:

First, there must be a clear trend on the chart, either bullish or bearish. Second, there must be at least two candlesticks with a specific formation that meet the engulfing pattern criteria.

Bearish Engulfing: Characteristics and Identification Criteria

Bearish engulfing occurs within a bullish trend, where the first candlestick has a small green (bullish) body, followed by a larger red (bearish) candlestick that completely engulfs the previous green body.

To identify a valid bearish engulfing, pay attention to three main criteria:

1. The length of the bearish candlestick body must be longer than the previous bullish candlestick body.
2. The low price of the bearish candlestick must be lower than the low price of the previous bullish candlestick.
3. The close price of the bearish candlestick should be lower than the low price of the previous bullish candlestick (not mandatory but strengthens the signal).

Contrast with Bullish Engulfing Pattern

Conversely, bullish engulfing occurs within a bearish trend, where the first candlestick has a small red (bearish) body, followed by a larger green (bullish) candlestick that engulfs the red one. The technical criteria for bullish engulfing reflect the opposite of bearish engulfing:

1. The length of the bullish candlestick body is longer than the previous bearish candlestick.
2. The high price of the bullish candlestick exceeds the high of the previous bearish candlestick.
3. The close price of the bullish candlestick exceeds the high of the previous bearish candlestick (optional but ideal).

A deep understanding of these two types of engulfing patterns is crucial in identifying potential reversals. Bearish engulfing, in particular, provides a strong signal that bullish momentum is weakening and buyers are losing control, often used by traders as a trigger to take profits or reverse positions.