Candlestick patterns have great importance in the forex industry as it predicts where the price direction is up to for the next moment. And not only this it will also help to foresee potential trading opportunities with proper marketing approaches. So, without any further ado, let’s hop into one of the most sought-after candlestick patterns with its full advantages and best pattern type!
What Does it Mean By Bearish Candlestick Pattern?
This candlestick pattern mostly appears in the financial market and clearly indicates that the prices are likely to go down. These patterns form when the open price is higher than the close price, and the body of the candlestick is generally red or black in color.
Despite its definitions, there are different bearish patterns including the shooting star, the hanging man, the bearish engulfing pattern, etc. There are a few distinct characteristics associated with each of these patterns that traders can use to identify potential trend reversals.
For instance, a trader may consider selling a security if they see a shooting star pattern forming on a chart since it indicates a decline in price is likely. Bearish candlestick patterns can also use as a way to confirm existing downtrends. Just like, if security is already in a downtrend and a bearish engulfing pattern forms, it may be a sign that the downtrend is likely to continue. If you sum up its definitions to the fullest, it will appear as the most beneficial tool for traders who always look to gain profits when the prices are going down.
What are the Different Bearish Candlestick Patterns?
Not only one or two, but there a several different bearish candlestick patterns available with the purpose to signify different market behaviors. Some bearish patterns may indicate that the market is becoming more bearish, while others may indicate that the market is becoming more neutral or even bullish. These different candlestick patterns may also indicate different levels of strength or weakness in the market, which can be useful for traders and investors to consider when making decisions about their positions. Let’s see a few among them!
Bearish Engulfing Pattern
It’s basically the technical charting pattern that signifies when the prices come to lower. It is a two-candle pattern that indicates a bearish reversal in the market. It is characterized by a small white candle, followed by a large black candle that fully engulfs the body of the first candle. This pattern suggests that the bulls were unable to maintain control and the bears took over, pushing prices down. It is typically seen as a strong bearish signal, indicating that the trend is likely to continue downward.
Pros
- You can leverage its benefits to minimize the investment risk as it helps a trader avoiding to enter a long position when the market is showing signs of weakness.
- It’s highly relatable due to the fact that it has a strong reversal in the market sentiment and can use as a signal to sell or short-sell a stock or asset.
- When the pattern shifts in the opposite direction, bearish engulfing patterns can be useful to clean upward prices.
- To confirm a bearish trend, it can be used with other technical analysis tools, such as moving averages and trend lines.
How To Trade Bearish Engulfing pattern?
To trade this bearish engulfing pattern with ease, first identify it thoroughly then place a sell order at the market price. This will allow you to capitalize on the downward trend that is likely to follow. Secondly, to protect yourself from potential losses, use stop-loss. It helps to minimize your risk and ensure that you do not lose more money than you are comfortable with. Thirdly, set a profit target to determine when to exit the trade and take your profits. And last but not least, manage your risk effectively. This includes keeping your position size small, using stop losses, and taking profits at predetermined levels. Your chances of success will be higher if you follow these steps religiously.
The Evening Star
No no! This is not the sky star you gaze at every day from your balcony but this is that star pattern that makes trading more fun and profitable. This pattern is mostly used by technical analysts to determine when a trend is about to reverse. It mainly consists of three candles; The first candle is a long white candle, which indicates a strong bullish sentiment, the second candle is a small candle that can be either a Doji or a spinning top, which indicates indecision in the market, and the third candle is a long black candle, which indicates a strong bearish sentiment.
An evening star pattern can signal a potential reversal for traders and typically occurs at the top of an uptrend. Nevertheless, this pattern is not always reliable, and other technical indicators and analyses should be used along with this one.
Pros
- It indicates the potential reversals for the traders which is valuable for traders looking to short the market
- Traders can also leverage this bearish candlestick pattern by identifying key support and resistance levels, which can help them to plan their trades more effectively.
- Being a trader, you can use the evening star pattern as a trigger to set stop-loss orders, which can help to minimize potential losses.
- The combination of this indicator with other trading indicators will give you even more confidence to trade since it will indicate conformational signals.
What Is The Famous Strategy To Trade The Evening Star Candlestick Pattern?
Well! While there are many proven strategies for trading this evening star candlestick pattern, using a bearish breakout will always be at the top. This breakout strategy can help traders manage risk by allowing them to set stop-loss orders at key levels, such as above the high of the evening star pattern. This helps to limit potential losses in the event that the trend does not reverse as expected. Despite it, if we see the overall benefit, it seems perfect due to its potential for confirmation of a trend reversal, risk management, and profit-making opportunities.
Dark Cloud Cover
When a security’s opening price is higher than its closing price on the previous day, but its closing price is lower than its opening price, this candlestick pattern forms. This signals that the bulls have given control of the market and that the bears have taken over. A long white body will follow by a long black body that totally covers the white body, producing a cloud of negativity. As a rule, this pattern indicates a possible downturn is on the way.
Pros
- Market volatility can increase when dark cloud cover patterns appear, as traders react to reversal signals. Traders may be able to take advantage of the increased movement of prices in this way.
- The dark cloud cover pattern often appears after a strong uptrend, which can confirm that the trend was indeed strong and that the reversal is likely to be significant.
- The dark cloud cover pattern can provide traders with a potential entry or exit point, depending on their trading strategy.
How Can You Trade It With Ease?
To easily trade the dark cloud cover candlestick pattern, you can utilize fundamental analysis tools such as trend lines and support and resistance levels to pinpoint your trade’s entry and exit levels. You can also use stop-loss orders to limit your potential losses if the market turns against your strategy. Before placing a trade, it is also best to wait for confirmation of the pattern by analyzing the price movement in the subsequent candles.
That’s all about the bearish candlestick pattern for today. However, there are some more candlestick patterns available in the market but these three are the most prominent. Do try them out with different strategies but a proper marketing approach!
