On the hunt: How to find a strong bearish pattern

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Updated: 04 March 2020

In a bearish engulfing pattern, candle two engulfs the entire body of the first candlestick. This is a pattern that shows up on a bullish market. It signals to you that there’s a price reversal on the downside about to come up. These strong bearish signals indicate very short trade setups, distinguishing them from weaker ones. In this sense, it acts as a preemptive measure.

What is a bearish market?

Identifying a bear market on the whole opens up several strategies as possibilities, including inverse ETFs. In short, a bear market is one in which prices are falling and everyone is selling; it could be a good time to pick up some bargains. On average, a bear market historically has lasted 15 months, with stocks falling by almost 33%. A bear market can be risky even for trading veterans, however, especially if all is not what it seems and action is taken where confusion resides. This is another reason it’s important to verify that you are in a bear market using all the tools at your disposal. Pullbacks, for example, could just be a result of qualitative easing by central banks.

In this current cycle, there have already been three pullbacks that looked like bears but were ultimately false bears. That is because the market of today looks vastly different from markets that have gone before thanks to mass auto trading and other factors.

Experts agree that the fundamentals of a bear market should still look the same but that a healthy dose of caution and re-verification are required at all times.

How to spot strong engulfing patterns

Here are some features of these robust engulfing patterns so you know how to spot them:

  • The second candlestick

The critical part is the second candlestick. Candlestick two should be long enough to engulf candlestick one in its entirety. If candlestick one is not very large, look at the range of the previous candlesticks. You need to examine at least the two previous ones. Their bodies and wicks should be completely engulfed by candlestick two, the one where your focus is. If this important element is in place, you know that the bearish engulfing pattern is quite strong. As always, it is better to be safe than sorry. Although this is a strong indicator, other checks should take place. These next two requirements should also be satisfied.

  • The Bollinger band

Candlesticks one and two should go beyond the upper limit or boundary of the Bollinger band indicator. Bollinger bands are one of two technical indicators that serve as a good measure of market volatility and help you track the direction of a trend. Bollinger bands are made of three lines, and each band is a moving average. The middle band usually consists of a 20-period moving average. It is the upper and lower bands that indicate volatility. You are concerned here with the upper band. On the whole, this is why Bollinger bands are really important as indicators in both forex trading and CFD trading.

  • The engulfing pattern

The bearish engulfing pattern you see shouldn’t show itself at the tip of the long-term upswing because this robust engulfing pattern you see could signal that the bull is running out of time rather than a trend reversal.

Once all these criteria are present in your pattern, you will know that you have found a really strong reversal pattern that is not a fake one and that can be used as a short trade setup.