Candlestick patterns form an important element in the education of any trader. They help you understand the ongoing market structure as well as what each candlestick may represent. Some of them are meaningless or neutral while others, based on extensive research by traders and analysts, could give a certain directional bias, keeping in mind the general context of the market.
In this article, we will explore a fairly common but powerful candlestick pattern that can hint at a possible reversal or bearish movement.
The bearish engulfing pattern (Figure 1), as the name implies, is a bearish candlestick that exceeds the opening and close of the previous candle. The bearish engulfing candle does not need to cover the previous high or low but if that is the case, the pattern is even more powerful. Essentially, the pattern is formed by strong selling and the lower close depicts a strong movement which is putting buyers from the previous candle at a loss.
In the example below, you can see how the candle completely covered the previous bar and even covered several bars before, indicating that neutral price action dominated before a sudden rush of sellers. The same candle showed a new high in the market, temporarily showing some demand before it completely reversed to the downside.
Figure 1 – Daily GBPJPY chart showing a bearish engulfing candle
There has been plenty of research and statistics done by researchers, market analysts, and even data scientists on candlestick patterns to confirm that they do hint at a possible direction that tells you how powerful they can be.
Candlestick patterns are not an exact science but keeping such patterns in mind can be a great addition to any trading system. Furthermore, observing the general behavior of candlesticks can also give clues about the context of the market. In other words, having a specific pattern that shows up is not enough and traders should study trends, market structure, context, sentiment, and other factors that could influence the possible direction of a trading product.
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