We have a fantastic guide on the most dependable bullish patterns. But for now, let’s get more detailed and useful by explaining 8 bearish candlestick patterns that every day trader should be aware of.
We’ll talk about these things:
- A bearish candlestick pattern: what is it?
- Bearish candlestick pattern trading strategies
- How these patterns appear
- The standards for evaluating them
- These candles’ narrative
- Buying and selling stocks using bearish candlestick patterns
- How to determine each entry’s risk
- Typical errors were made when interpreting them.
A BEARISH CANDLESTICK PATTERN IS WHAT?
A single candlestick or a group of candlesticks with a bearish pattern typically indicates that the price of a stock will decline. Usually, they tell us a tale of exhaustion, in which the bulls are giving up and the bears are gaining control. These patterns often reverse themselves.
Hopefully, by this point in your trading career, you are aware of the significance of candlesticks. They tell a story in addition to offering a visual representation of price on a chart. The underlying assumption of this tale is that the chart contains all the information we require, with the what taking precedence over the why. Regardless of the underlying “value,” each candlestick represents the emotions of the buyers and sellers.
BEARISH CANDLESTICK PATTERNS: HOW TO TRADE
Combining bearish candlestick patterns with price action trading strategies is the best way to trade them. To predict future price movements, for instance, bearish candlestick patterns can be added to your toolbox by studying price action strategies like reversals or pullbacks.
Clearly, the downside is the prediction for a bearish candlestick pattern. You would therefore do well to learn how to short sell or to employ these bearish strategies so that you can determine when to take profits or anticipate pullbacks in your long positions.
BUYING/SELLING STOCKS USING BEARISH CANDLESTICK PATTERNS
Typically, we prefer to sell stocks using bearish candlestick patterns. This is because they offer us a clearly defined area of risk with a predetermined reward. You will soon see, for instance, the eight bearish candlestick patterns that we list below. Each one enables you to set your maximum risk above the pattern and serves as a trigger for your entry.
This is an easy method of risk management while you wait for the candlestick pattern to develop. It may also provide you with a potential entry-level target. Bearish candlestick patterns can also be used as sell signals when buying or selling stocks. To put it another way, if you have been long in a position and you observe a bearish candlestick pattern, you may be able to predict when a reversal will occur. This may inspire you to hold onto some of your gains from the reversal.
WHAT PATTERNS ON CANDLESTICKS ARE BEARISH?
Now that you are aware of what a bearish candlestick pattern is, it’s time to look at some bearish candlestick patterns. Let’s get started with the 8 bearish candlestick patterns you need to be familiar with for day trading now.
1.THE SHOOTING STAR
In case you were curious, candlestick pattern names typically refer to a visual representation of a real-world object. They were frequently given that name by the Japanese.
It will happen at the peak of an uptrend that is currently underway, which is typically an extended trend.
It resembles a shooting star that has just left the heights of the heavens.
When that trend comes to an end, the stock makes one last attempt to move higher before reversing course. This is how the shooting star got its name.
Which door would you use?
The reversal may be predicted by more aggressive traders as the candle is forming. Alternately, you can wait until the shooting star has ended, enter, and position your stop at the candle’s highest point.
SHOOTING STAR EXAMPLE
An excellent illustration of this pattern is given by AMC during a recent intraday session. It was easy to see that the trend was rising and lengthening. The stock makes a dramatic ascent to new highs before turning around on higher volume.
Observe the second reversal candle that is located beyond the shooting star. It slightly circles back into the shooting star’s wick. This is a great illustration of why you shouldn’t wait for entry on the second candle or place your stops/risk too close together.
Visit our post on trading with the Shooting Star for a more detailed examination of this pattern.
2.BEARISH ENGULFING CRACK
Different contexts lend themselves to the reversal pattern. It can happen before the market opens or during a long uptrend.
The pattern’s underlying hypothesis suggests that strong supply levels completely outweigh bulls’ efforts to drive a stock upward. As a result, the price starts off above the previous candle and then sharply declines.
The new candle should close below the old one when its body completely “engulfs” it.
Depending on experience, there may be a few optional entries on this pattern. If supply is readily apparent, aggressive traders may decide to enter as the candle is forming. This entry is more of anticipation.
If you trade “by the book,” you might want to hold off until the new low has been verified before entering on the subsequent candle. The best trading strategy is to enter as an overextended trend reversal or in the direction of the larger trend. Depending on the candle’s range, place your stop either in the candle’s body or at its high.
BEARISH ENGULFING EXAMPLES
On the 5-min chart, FCEL is the ideal illustration of this bearish candlestick pattern. Take note of the stock’s downward trend from pre-market. Additionally, VWAP, the red indicator line on the following chart, is having difficulties.
The stock tries to move higher right away after the market opens, but there is some selling pressure visible in the upper wick of the first green 5-minute candle. The price then drops, effortlessly engulfing that candle on the downside.
This also serves as a fantastic illustration of an opening range breakdown.
BA offers us an alternative perspective on this bearish candlestick pattern.
Here, take note of the reverse from an extended intraday run. Similar to the previous illustration, the 5-minute candle completely consumes the earlier candle. This time, the volume has increased.
How does that inform us?
Consider effort versus outcome. The price experienced a complete downward retracement as a result of the increased effort (volume) (link between effort and result). This gives us the assurance to short, taking risks in the direction of the highs.(DAY TRADING:)
3.BULLISH ENGULFING SANDWICH
Don’t let the name mislead you. Another name for this is a “stick sandwich.” In this particular situation, it is not a bullish pattern. The key here is that the bearish candles “sandwich” the “bullish” engulfing candle in the middle of the pattern. It takes more than one supply candle in this situation to satisfy the demand. The pattern must appear on three or four candles before it is confirmed.
Entry is based on lower lows on the reversal candle as confirmation of a breakdown. The bodies of the candles above can be set with stops.
BULLISH ENGULFING SANDWICH EXAMPLE
At the start of the market, FUBO offers a great chance to observe this bearish candlestick pattern in action.
Take note of the downward trend from the premarket. Additionally, it was still falling from the day before.
The stock struggles to move at vwap. It tries to turn around, but you should pay attention to the volume of the green reversal candle. It cannot compete with the supply in the day’s first 5-minute candle.
The first candle’s effort dwarfs the bulls’ efforts.
The stock then resumes its downward trajectory or vwap, and the bulls once again yield to the bears.
Read more in our blog post on the Stick Sandwich to learn more about this bearish pattern and its bullish counterpart.
5. DAY TRADING: TWEEZER TOP
Another continuation or reversal pattern is the tweezer top.
The wide body bullish candle, which may indicate uptrend exhaustion, is the first component. The upward movement that follows is weak or nonexistent, which causes the reversal.
As supply is added to the market and weak hands are tempted to keep buying both of these candles, the volume should be rising.
If possible, the two candles should roughly correspond to the same high to form a bearish pattern.
EXAMPLE OF A TWEEZER TOP
Look at this tweezer top from AMC. Can you make out that the red and green candles are the right colors to represent the two sides of a pair of tweezers?
You can enter aggressively as the tweezer forms depending on the candles’ range, especially if the supply seems plentiful.
Otherwise, you can wait until the candle burns out before making your entry and place your stop at the day’s high or in the tweezer top. Depending on the risk/reward you are seeking, your risk personality, and the size of the position, you may choose to do this.
The chart shows that vwap can frequently be a good target area.
6.DARK CLOUD COVER
The bullish reversal pattern known as Piercing Line has an opposite pattern called Dark Cloud Cover. A solid green or white bar that continues the uptrend is required before the bearish pattern can be considered valid.
We anticipate seeing another candle attempt to reach new highs after the bullish candle closes. After failing, this new candle closes more than halfway through the body of the first candle. As a result, the overhead supply is referred to as “dark cloud cover.”
One of the best times to play this pattern is during a brief reversal in an overall downtrend. You can predict the rally’s end as the stock tries to overcome resistance.
Positions should be taken as soon as the stock surpasses the previous bar, with stops placed at the candle’s high.
EXAMPLE OF A DARK CLOUD COVER(DAY TRADING:)
The market will occasionally treat us to a nice double-top failure during a downtrend. Recently, RIOT provided us with this intraday opportunity when it pulled back from the morning lows only to run into resistance at vwap.
7. SHRINKING CANDLES
Candles that get smaller are a well-known illustration of effort versus outcome. It is a bearish reversal candlestick pattern that frequently has a significant volume signature below it.
It is recognized that more work is being put into getting the stock to new highs. The outcome is, however, deteriorating.
What do we make of this?
Given the circumstances, it should be assumed that the price is moving slowly upward while a sizable amount of selling pressure is contributing to the volume. The demand is being resisted by this selling pressure.
SHRINKING CANDLES EXAMPLE
Here is an actual example from the BTBT 5-minute chart. Pay close attention to the volume and how it relates to each candle as you examine this chart.
As it can be seen, the most volume occurs as BTBT attempts to climb above the pre-market highs. The candles start to get smaller as it proceeds.
As supply, or gravity in this case, chokes this rocket off its morning lows, momentum is lost. Early break-out buyers are taken advantage of by strong hands, leaving them holding the bag as the stock declines for the remainder of the day.
Hopefully, as you study the chart, you can identify a fantastic short entry as the final green candle is broken to the downside. A close risk/stop can be placed at the highs because the double top is obvious.
Visually, the Hammer pattern is very similar to the Hanging Man pattern. At the end of a downward trend, the Hammer is typically bullish. The Hanging Man, on the other hand, is a bearish candlestick pattern at the conclusion of an uptrend. Recognizing this pattern requires understanding selling pressure.
There is a lot of selling pressure present inside the candle’s formation at first. The selling pressure is largely overcome as the market rallies, so the close at the highs can be deceiving. This frequently presents a chance to catch longs who might think that supply has been surpassed by demand. The supply is still there, though.
HANGING MAN EXAMPLE
Check out this lovely uptrend on the most recent intraday PLUG chart. Nothing seems to be able to reverse the upward momentum. That is until the Hanging Man signals to us that the time has come to stop.
The most advantageous risk/reward entry would be at the top of the following candle, which would come after the Hanging Man candle closes.
It does offer a right shoulder for entry later if you aren’t quick enough to enter at the close of the Hanging Man and risk the highs.
Read more: 16 Candlestick Patterns: Every trader need