Bearish engulfing candle

The first candle of the pattern is rising and continues the advance. The second is falling and larger: it opens at or above the close of the first and closes below its open. Only the bodies are compared – the wicks of the first candle may stick out.

The pattern comes from Japanese candlestick charting. Its message: buyers opened the period on top, and by the close sellers had erased the whole previous candle.

Where a market closes overnight, the second candle usually opens with a gap up. In crypto the open normally equals the previous close. Traders accept the pattern as long as the close is below the previous open.

• Prior trend – a clear advance, or a bounce inside a larger downtrend.
• First candle – rising. A small body is typical: the advance is already slowing.
• Second candle – falling, with a body that covers the first body from top to bottom.
• Close – near the low of the second candle. A long lower wick means buyers pushed back before the close and weakens the signal.
• Location – at a previous high, a resistance level or a round number the pattern gets more attention.

The reading is stronger when the engulfing candle forms after a sweep of a previous high, at resistance, or together with a bearish divergence on the RSI. Replay mode on Charts lets you check this on past tops one candle at a time.

• Entry – short on the close of the engulfing candle, or when the next candle trades below its low. Some traders wait for a retest of the middle of the engulfing body.
• Stop – above the high of the pattern, the higher of the two candles' highs.
• Target – the nearest support: the last swing low, a previous consolidation, or a fixed multiple of the risk.
• Long positions – the pattern is a common reason to take profit or raise the stop, even without opening a short.

At the end of a long advance the pattern is a reversal signal: it marks the first period in which sellers clearly won. Inside a downtrend it appears at the top of a bounce and is read as continuation – the pullback is over and the trend resumes.

The second case trades with the larger trend, and many traders prefer it for that reason.

• Bullish engulfing – the mirror image: after a decline, a rising body covers the previous falling body.
• Dark cloud cover – the falling candle closes below the midpoint of the rising body but not below its open. A partial engulfing.
• Bearish harami – a small falling body inside the previous large rising body. It is read as a pause and is weaker than an engulfing.
• Evening star – three candles: a long rising one, a small one above it, then a long falling one. See morning star vs evening star.
• Shooting star – a single candle with a long upper wick. On a higher timeframe the two candles of a bearish engulfing often merge into one.

• Shorting a strong uptrend on one pattern – trends produce many failed bearish signals before they end.
• No advance before it – in a flat market the pattern has nothing to reverse.
• Ignoring size – two small candles are not a shift in control. The falling body should stand out against recent candles.
• Selling into support – if the engulfing candle closes just above a strong level, the room for the trade is small.
• Stop at the open of the engulfing candle – the level that cancels the idea is the high of the pattern, not the top of the body.