Bearish Engulfing Candles Explained & Reliability Tested

Our research shows the Bearish Engulfing candle is an accurate and profitable pattern.

Our 568 years of data reveal a 57% success rate and an average win of 3.7%.

Is the Bearish Engulfing candle bearish, and how should it be traded profitably?

To uncover the truth, I meticulously tested 4,096 Bearish Engulfing trades over 568 years, encompassing both bull and bear markets.

 

Get ready to master trading the Bearish Engulfing pattern based on solid, data-driven insights!

What Is a Bearish Engulfing Candle?

A Bearish Engulfing Candle is a technical trading pattern that theoretically signals a potential market reversal from bullish to bearish. It is characterized by a larger, “engulfing” candlestick that follows a smaller, bullish candlestick.

The opening price of the Bearish Engulfing candle is typically higher than the previous day’s close, and its closing price is lower than the previous day’s open, thus entirely encompassing or “engulfing” the body of the earlier candle.

This significant pattern indicates that the selling pressure has surpassed the buying pressure, suggesting a shift in market sentiment. However, traders often seek confirmation of this pattern through other indicators before making trading decisions.

Although a lesser-known pattern in Japanese candlestick analysis, the Bearish Engulfing candle deserves greater recognition and utilization among traders based on our extensive testing. Its incorporation into trading strategies can yield favorable outcomes and enhance overall market analysis.

The Truth About Bearish Engulfing Candles

When a Bearish Engulfing candle forms in the market, the price action typically exhibits distinct characteristics that signify a potential shift from a bullish trend to a bearish one.

• Bullish Trend: Before the formation of the bearish engulfing candle, the market is usually experiencing an uptrend characterized by a series of higher highs and higher lows. Buyers dominate the market sentiment, pushing prices higher.
• Bullish Candlestick: The formation starts with a smaller bullish candlestick, representing buying pressure. This candlestick signifies the continuation of the prevailing uptrend.
• Bearish Candlestick: Following the bullish candlestick, a larger bearish candlestick emerges. It engulfs the entire body of the previous candlestick, indicating a dramatic shift in market sentiment and a potential reversal.
• Selling Pressure: The bearish candlestick shows increased selling pressure, overpowering the buying pressure seen in the preceding candlestick. This surge in selling volume suggests that bears are gaining control over the market, leading to a price decline.
• Price Gap: The opening price of the bearish candlestick is usually higher than the closing price of the previous bullish candlestick, creating a gap between the two. This gap further emphasizes the shift in sentiment and highlights the bearish momentum.

The formation of a bearish engulfing candle suggests that sellers have taken control and that a bearish trend may follow. Traders often view this pattern as a signal to consider taking short positions, tightening stop-loss levels, or liquidating long positions.

But is this a correct assumption?

Traders believe this pattern signifies sellers are gaining momentum against buyers, heralding a potential bearish trend. My decades of research suggest this theory is incorrect. The Bearish Engulfing pattern is the fourth most bullish of all candle patterns.

Types of Engulfing Candle

There are two types of Engulfing candles: Bullish Engulfing and Bearish Engulfing. The Bullish Engulfing is one of the poorest-performing candlestick patterns we have tested, with 0.46% profit per trade. But the Bearish Engulfing is the opposite; it is the 4^th best candlestick pattern with a high win rate and profit per trade.

Bearish Engulfing Candle Data

The data suggests a Bearish Engulfing candle can occur during an uptrend or downtrend and can be a reversal or continuation pattern. The image below shows four Bearish Engulfing candles, three of which occur during a downtrend, thus accelerating the price decline, and one occurs during an uptrend, signifying a reversal.

The theory touted by mainstream financial publications that the Bearish Engulfing candle is a bearish reversal pattern is not supported by the data. 57% of Bearish Engulfing candles produce a 3.7% profit over the next ten days. This also means that 43% of the time, it produces a 3.5% loss or a 3.5% gain if you short the trade.

Candle Pattern Recognition with TrendSpider

Our testing shows the Bearish Engulfing candle indicates bearish sentiment but results in a bullish move over the next ten trading days.

The Psychology of the Bearish Engulfing Candle

The psychology of the Bearish Engulfing candle is that buyers are optimistic and push up prices during the first day. On the second day, prices collapse due to extreme pessimism, shown in the long red/filled bearish candle.

This hugely negative trading day shifts the momentum because the selling pressure has been exhausted, and a potential reversal might be coming. The Bearish Engulfing Candle, therefore, represents a battle that leads to downside price exhaustion and a potential buy point, signaling the beginning of a bullish trend.

Trade a Bearish Engulfing Based on Data

When trading Bearish Engulfing candles, waiting for the next day open and observing the price direction before making a trade is important. Our tests show a Bearish Engulfing candle has a 57% chance of a 3.7% profit over the next ten days. If you improve your entry and wait for confirmation before trading, you can increase this profitability.

While the Bearish Engulfing signifies a bearish end to the trading day, this does not guarantee the next day will be negative, but it suggests that 57% of the time, the next ten days will be a bullish uptrend.

Trading the Bearish Engulfing: Apple Inc. 20-Year Test

Our backtesting data on Apple Inc. (below) shows two trades in Apple Inc. Each trade was ten days long, and the results were +8.32% and -0.77%. Here, you can see the Bearish Engulfing candles acted as a continuation of the prevailing uptrend and downtrend.

Thanks to TrendSpider’s strategy tester, we can see Bearish Engulfing’s high 64% win rate and profit of 5.61% per winning trade. The average gain across all winning and losing trades was 1.88%, which is very good.

This also demonstrates that what asset you trade (Apple Inc.) is just as important as how you trade (chart indicators or patterns). The long-trade profitability of Apple Inc. is significantly higher than other stocks.

Auto-Trade Candles with TrendSpider

Enhancing a Bearish Engulfing Trading Strategy

If you’re using the Bearish Engulfing trading strategy, it is beneficial to use trustworthy companion indicators such as the Relative Strength Index (RSI), Rate of Change (ROC), VWAP, or Weighted Moving Average. Utilizing these techniques can improve your trading strategy’s overall quality and efficiency. It’s important to test this out for yourself, ideally with the help of TrendSpider.

My Bearish Engulfing Testing

Using TrendSpider, I tested 30 Dow Jones Industrial stocks over 20 years. This amounted to 4,096 Bearish Engulfing trades and 588 years of data. The Bearish Engulfing must be fully formed to enter a trade, and the buy signal must be executed on the next trading day’s open price. Each trade was exited at the open exactly ten days later.

Candle Testing Methodology:

• Pattern: Bearish Engulfing
• 30 DJIA Stocks
• Daily Chart
• Strategy: Buy Long
• Test Period: 2003 to 2023
• Buy at the next open
• Exit after ten days
• Pattern Recognition performed by TrendSpider

Bearish Engulfing Backtesting

Using TrendSpider for trade identification and execution gives fast and precise results. To evaluate candlestick patterns and strategies independently, follow the instructions below and check out the screenshot for reference.

1. Register for TrendSpider.
2. Buy Signal: Select Strategy Tester > Entry Condition > Add Parameter > Condition > Candlestick pattern > Bearish Engulfing > Evolved.
3. Sell Signal:  Add # Candles Passed = 10.
4. Click “RUN” to execute the backtest.

Backtesting Done with TrendSpider

Test Results

After conducting 4,096 trades on 568 years of data, we confirm the Bearish Engulfing profit per trade to be 0.62%. A 0.62% win rate means trading a Bearish Engulfing long will net you an average of 0.62% profit per trade if you sell after ten days. Conversely, short-selling a Bearish Engulfing, you should expect to lose -0.62% per trade. This proves this pattern is strongly bullish.

The percentage of Bearish Engulfing winning trades was 57% versus 43% losing trades, significantly higher than the 55.8% average performance across all candlestick types. The Max Drawdown was -39.7%, versus the stock’s drawdown of -59.3%, which shows less volatility than a buy-and-hold strategy.

The average winning trade was 3.7% over ten days, and the average losing trade was -3.5%; this represents a reasonable profit margin, especially when combined with the 57% successful trades.

The reward-to-risk ratio is 1.06, the 10th highest of the 25 candles we tested. We have seen better Reward/Risk ratios in our testing of “The most successful chart patterns.”

Results Summary

Ultimately, for every long trade you make after a Bearish Engulfing appears on a daily stock chart, on average, you should make 0.62% after holding for ten days. This solid result makes the Bearish Engulfing one of the best candlestick patterns to trade.

Conversely, one of the worst candlesticks for trading is the Bullish Engulfing, with a profit per trade of 0.46%. We compare both the Bullish and Bearish Engulfing patterns in the table below.

Performance Data Table: Bearish Engulfing vs. Hammer

Our combined testing of 1,136 years of data shows the Bearish Engulfing vastly outperforms the Bullish Engulfing candle by 26%.

Test Results	Bearish Engulfing	Hammer
Data Analyzed (Years)	568.3	568.3
# Trades	4096	3735
Wins	57.0%	55.0%
Losses	43.0%	45.0%
Max Drawdown	-39.7%	-40.2%
Max Drawdown (Asset)	-59.3%	-59.3%
Average Win	3.7%	3.5%
Average Loss	-3.5%	-3.3%
Average Return Per Trade	0.62%	0.46%
Reward/Risk Ratio	1.06	1.06
Sharpe Ratio	0.22	0.11
Sortino Ratio	0.70	0.54

Get The Best Backtesting Software

My original groundbreaking research on the profitability and success rates of chart patterns and indicators relies on the best backtesting software available. If you want to craft an original, profitable trading strategy, dive into our exclusive review of the best backtesting software to find the perfect solution for your future trading needs!

Is a Bearish Engulfing Candle Bullish or Bearish?

Our extensive testing revealed that the Bearish Engulfing pattern indicates bullish behavior. Our analysis of 4,096 trades shows a 57% tendency toward bullishness and 43% toward bearishness.

Is a Bearish Engulfing a Reversal Pattern?

Our data shows that Bearish Engulfing is not a clear reversal or continuation pattern. Our data shows Bearish Engulfing candles occur during uptrends and downtrends, but they do not exclusively signal a price reversal; they can also be continuation patterns.

Does the Bearish Engulfing Candle Work?

Yes, the Bearish Engulfing works well in trading, producing a 57% success rate. The average profit per trade is 4^th highest of all candles, with 0.62% after ten days. If you sell it short, it will average a -0.62% loss.

Is a Bearish Engulfing Candle Accurate?

Yes, a Bearish Engulfing is the fourth most accurate candle pattern to trade; it results in 57% of trades winning and 43% losing. The average winning trade is 3.7%, and the losing trade is -3.5%. Using a Bearish Engulfing is a distinct advantage in candle trading.

Can the Bearish Engulfing Candle be used for Buy and Sell Signals?

Yes, our data shows that Bearish Engulfing candles can be used for buy and sell signals. Its 57% accuracy across 4,096 trades shows the Bearish Engulfing provides a solid bullish signal.

Is a Bearish Engulfing Candle Reliable?

Yes, the Bearish Engulfing is reliable. According to 4,096 tested trades, a Bearish Engulfing is 57% reliable for bullish trades. It has a good 0.62% average profit, and the average winning trade was 3.7% over ten days.

Summary

In conclusion, the Bearish Engulfing is a reliable and profitable pattern in Japanese candlestick analysis. It has a good accuracy of 57%, resulting in a profit per trade of 0.62%. Our data proves it has bullish predictive qualities.

All traders would benefit from investing in a comprehensive trading training course to help them make more informed decisions while managing their risks properly. So why not check out Liberated Stock Trader’s advanced investing course today?

 

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