Bearish Candlestick Patterns : Complete Guide
Charting formations like candlestick patterns are well known by traders for the fact that they offer insights into a market’s future prices. Like the bullish candlestick indicators signify an up move’s continuation, bearish candlestick indicators signify that a turn over or continuation of a down move is possible. Knowledge of these patterns may come in handy for the trader willing to buy stocks that are in a period of bear market run or conversely avoid stocks during a period of bear run. The reader of this guide will be given insight on how the most popular bearish candlestick patterns can be used by traders.
Understanding Candlestick Patterns Basics
A brief introduction on bearish patterns takes into consideration the structure of a candlestick. Each candlestick represents the price movement within a specific timeframe (such as one minute, an hour, or a day) and consists of four main components:
Open: The given price at the beginning of the time period within which an asset is owned by a business.
Close: The final price in the period at which the asset market of the country was established.
High: The maximum price for the asset throughout the period under consideration.
Low: The least value the asset has attained in terms of the period in consideration.
A bearish candle is often painted black or filled showing that the candle’s closing price is below the opening price. Specifically, today we will focus on the most bearish candlestick formations that you would likely come across in trading.
Bearish Candlestick Patterns
1. The bearish engulfing candlestick pattern
Description:
bearish engulfing candlestick pattern is amongst the most famous and precise bearish reversal candlestick patterns out of all known ones. It consists of two candles: the first is a bullish (green) candle and the second one is bearish (red), that is larger than the first and also encompasses the whole body of the second one.
Interpretation:
It is conducted in an uptrend manner which means it points towards a possibility of reversing. The large black bearish engulfing candlestick pattern indicates that sellers are more dominant that buyers for a particular commodity, a change in perspectives.
How to Trade:
Often traders expect the pattern to confirm by seeing a further continuation of decline in the candles in the following bars. To control risk a stop loss is placed slightly above the high of the two candlesticks that comprise the engulfing pattern.
2. The Dark Cloud Cover
Description:
It is a two candle signal referred to as the two cloud cover pattern in darkness. It begins with a bullish candle that is succeeded by a bearish candle which opens higher than the peak of the first candle but then closes below the midpoint of the first candle’s body.
Interpretation:
This pattern tells that buyers were in the most powerful position to control but sellers invaded and dragged the price down and there is a question mark above the previous bullish pattern.
How to Trade:
Bearish traders expect the following candle to confirm the presence of the dark cloud cover on the chart. This is placed just above the high of the second candle for enhanced security most of the time.
3. The Evening Star
Description:
The evening star is a pattern where we have three candles with the main candle being a bearish candle. This pattern starts with a massive bullish candle, a small candle in the middle (pros and cons), and a large bearish candle that is capped beneath the midpoint of the bullish candle.
Interpretation:
This pattern illustrates a sort of trend where the whole process has been changing from bullish to bearish. That little middle candle shows a bit of the uptrend, but then, a very strong bearish set up.
How to Trade:
The short position is entered by waiting for confirmation after the third candle by most traders. These are put above the high of the middle candle to minimize loss making.
4. The Shooting Star
Description:
The shooting star is a bearish formation of one candle that appears at the top of an upward trajectory. HSB has it small near the candle’s low, a long upper wick, and minimum or no lower wick.
Interpretation:
The top thick wick indicates that buyers exert pressure and could force the price further up but they cannot sustain this hence allowing the sellers to force the price down.
How to Trade:
The shooting star is usually followed by a bearish confirmation like the bearish candle. Stop-loss is largely placed above the upper part of the shooting star’s candle.
5. The Hanging Man
Description:
Similar to the Donkey Head pattern, hanging man pattern is a single candle formation pattern which also takes place during the bullish period. It has a small pan near the candle’s height with a long sticker and very less or dapper sticker.
Interpretation:
The long lower wick shows that sellers managed to bring down the price, while buyers brought it back up. It indicates some exhaustion of the uptrend as the sellers have taken over this level of the bar.
How to Trade:
The hanging man is confirmed with a bearish candle that follows and enables the trader to take a short position. A stop-loss is usually set slightly above the high-price of the hanging man candle.
6. The Three Black Crows
Description:
The three black crows pattern is formed by three black bearish candles in a row with lower high and lower low tops. Most preferably they have big and thin bodies and small and thick wicks pointing that there has been so much selling pressure on that currency.
Interpretation:
This pattern indicates a clear bearish platform and it is indicative of a start of a bearish run since the sellers are always on the upper side of the trend for several sessions.
How to Trade:
The three black crows can be followed by the entrance into a short position with a stop above the high of the first candle in the pattern. Some traders may wait for a slight pull back as they do not want to be chasing the trend up at any given instance.
7. The Bearish Harami
Description:
The bearish harami refers to the two candle formation whereby a small bearish candle is entirely shaded by the larger bullish candle.
Interpretation:
This pattern suggests the presence of confusion and conceivably a reversal trend because the small candle is an indication of a brief stagnation of the uptrend.
How to Trade:
Markets seek for a bearish candle after the harami to affirm the reversal. A stop-loss is preferably placed above the high of the bullish candle.
8. The Gravestone Doji
Description:
The gravestone doji pattern is a single-bar pattern, which has a long upper shadow, and the open, close, and low are almost the same.
Interpretation:
This pattern suggests buyers tried to jack up the price, but sellers pushed it back down, which is a sign that the price may reverse at the top of an uptrend.
How to Trade:
If the next formed candle is bearish then the trader may go for a short entry. To lessen risk, the stop-loss may be entered above the high of the gravestone doji.
9. The Bearish Abandoned Baby
Description:
The bearish abandoned baby is a rather infrequent yet very accurate three-candle formation. It comes with a bullish candle then the formation of a doji that opens at a different price level higher than the black candle and a bearish candle with an opening at the doji’s low.
Interpretation:
This pattern depicts a position that an uptrend has been replaced or given up as demonstrated in the gap down after a doji.
How to Trade:
When traders see this pattern, they wait for any bearish candle to confirm before they begin short selling. A stop-loss can be placed much higher than the high of the first candle in particular.
10. The Bearish Tweezer Top
Description:
The bearish tweezer top pattern is at two candlestick formations and the two consequent candles have almost similar high points. Usually the first candle is upwards, while the second candle is downwards which forms a double apex.
Interpretation:
Previously, buyers were the ones trying to increase the price but were served with the same in response, a sign that the market forces may be changing.
How to Trade:
After the tweezer top, traders can look forward to an appearance of a confirmation bearish candle to open a sell trade. A stop can be placed slightly above the highs of the tweezer candles.
Lessons on How to Use Bearish Candlestick Patterns Correctly
Combine with Other Indicators: Candlestick patterns should be used in conjunction with other moving averages, RSI, MACD and other line studies to determine direction and strength of trend.
Understand Market Context: Trends are more accurate in trending markets compared to range bound markets. It is important to analyze the overall tendency before making some action related to the bearish pattern.
Risk Management: Like in any trading plan, managing risks is crucial for success in a trading strategy. It is recommended one should set stop losses and also synchronize their beliefs with the reward risk ratio, prior to getting into that particular trade.
Wait for Confirmation: Most patterns are not going to be chimerical on their own and are likely to generate false signals. A trading decision is only made when there is confirmation with the next price movement.
Practice on Demo Accounts: For the novices, it is particularly important to acquire such experience on a demo account and to work it through to be able to distinguish such patterns on a real account.
Conclusion:
There are several bearish candlestick patterns, which can be very useful if one is planning to trade during the bear markets or to avoid getting caught up in the opposite direction in a change of market trend. That is why identification of these forms, including bearish engulfing, dark cloud cover, evening star, etc., will help to make a better decision. Remember, nonetheless, that no pattern is perfect, and it is essential to refer constantly to the model. candlestick patterns to other analytical tools and following strict money management or risk management rules mean that you will be able to get better results in trading and therefore improvise the ways of dealing with the markets.
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FAQ'S
What is a Bearish Kicker Pattern ?
A Bearish Kicker Pattern is a powerful two-candle pattern signaling a sharp reversal. It appears when a bullish candle is followed by a bearish candle that opens with a gap down, moving sharply lower, with no overlap with the previous day’s price.
What are some examples of Bearish Reversal Patterns ?
Some popular bearish reversal patterns include:
- Evening Star
- Shooting Star
- Hanging Man
- Dark Cloud Cover
What is a Bearish Engulfing Pattern ?
A Bearish Engulfing Pattern is the two-candle reversal. This means that there is a little bullish candle followed by the larger bearish candle “engulfing” an entire preceding day’s candle, showing that this event may provoke a potential end of an existing trend-uptrend.
What are some common types of bearish candlestick patterns ?
Some commonly recognized bearish candlestick patterns include:
- Bearish Engulfing Pattern
- Bearish Reversal Patterns (e.g., Evening Star, Shooting Star)
- Bearish Kicker Pattern
- Dark Cloud Cover
- Hanging Man
