Traders use the bearish engulfing, like many other candlestick patterns, to identify trends. The engulfing patterns are especially necessary to make accurate trading decisions. This pattern is widely used in crypto trading and is considered one of the most reliable indicators of a potential trend reversal.
We will go deep into what it means by bearish engulfing, and how crypto traders use this pattern to make profits.
What is the Bearish Engulfing Pattern?
Unlike the bullish engulfing, this appears during an uptrend, usually signaling a reversal. The pattern begins with a green candle. The green candle is followed by a red candle, completely engulfing the first green candle. This pattern is a sign of a potential trend reversal, indicating that the bears are taking control of the market.
The pattern forms with two distinct characteristics. A red candlestick with a high opening price. The second part is a green candlestick with a closing price lower than that of the red candle. Also, the price of the green candle opens higher than the price with which the red candle closes. The bearish candle in the pattern is usually larger than the bullish candle, indicating a strong bearish sentiment in the market.
Usage of Bearish Engulfing Pattern in Crypto Trading
Bearish engulfing pattern is a powerful tool for traders to identify potential trend reversals in the crypto market. Following this pattern, it’s easy for traders to analyze charts and make profitable decisions.
Below are some of the ways traders use the bearish engulfing pattern in crypto trading:
Identifying Potential Trend Reversals
The pattern is good for identifying trends. Particularly, to know when an uptrend is coming to an end, also signaling the beginning of a downtrend. When a market trends upwards, the appearance of the formation signals a possible trend reversal. The buyers may be losing power or control of the markets and the sellers may be taking over from them. Crypto traders can sell their long and enter into short positions for an inbound downtrend.
Confirming the Downtrend
Traders also use the bearish engulfing pattern to confirm the beginning of a downtrend in the crypto market. When an uptrend is prolonged and a type of the engulfing pattern forms suddenly, the market will reverse. A corresponding downtrend is now most probable. Traders take this as a signal to sell their positions or enter into short positions to profit from the downtrend.
Setting Stop Loss Orders
Traders also use the bearish engulfing pattern to set stop loss orders to manage their risk. A stop loss goes above the high set by the bullish candle in the formation. This is in the even that a bearish engulfing pattern forms. This helps them to limit their losses in case the market does not follow the expected trend.
Combining Bearish Engulfing Pattern with Moving Averages
Traders often combine the bearish engulfing pattern with moving averages to confirm the potential trend reversal. They use the moving averages to identify the trend direction and the engulfing pattern to confirm the trend reversal. When the formation appears below the moving averages, it confirms the downtrend, and traders take this as a signal to enter into short positions.
Limitations of the Bearish Engulfing Pattern
While the candlestick pattern is a popular and reliable indicator of a potential trend reversal in the crypto market, it has some limitations that traders should be aware of. Some limitations of the pattern include:
False Signals
One of the limitations of the bearish engulfing pattern is that it can sometimes give false signals. Traders should not rely solely on this pattern to make trading decisions. This pattern is a decent combination with other smart trading setups like the moving averages.
Market Volatility
Another limitation of the bearish engulfing pattern is that it may not work well in highly volatile markets. In such markets, the price fluctuations can be rapid and significant, making it difficult for traders to accurately identify the pattern.
Timeframe
Traders should also be aware that the bearish engulfing pattern works best on longer timeframes, such as daily or weekly charts. Shorter timeframes may lag a bit and create inconsistencies.
Subjectivity
The interpretation of this candlestick pattern can also be subjective. Different traders may interpret the pattern differently, leading to different trading decisions. As previously mentioned, other indicators will help the use of this candlestick formation. The pattern is never used in isolation.
Bottom Line
Traders use this pattern to identify the end of an uptrend, confirm the beginning of a downtrend, set stop loss orders, and combine it with moving averages to confirm the trend reversal. Traders must use this pattern in combination with other technical indicators to increase their chances of making profitable trades in the crypto market.
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