What Is A Bearish Reversal Pattern: While trading in the stock market you must have come across candlestick patterns that can give you a hint about which way the market is going to move or if the prevailing trend going to change.
There are certain reversal patterns you can identify to capture a trend reversal. In this article, we are going to understand what bearish reversal patterns are and the different types of bearish reversal patterns.
What Is A Bearish Reversal Pattern?
In trading, a bearish reversal pattern is a formation that indicates a potential trend reversal from bullish (an upward trend) to bearish (a downward trend).
These patterns can provide valuable information for traders, as they can signal a potential selling opportunity.
Bearish reversal patterns can form with one or more candlesticks; most require bearish confirmation. The actual reversal indicates that selling pressure has managed to outshine the buying pressure for a period of time.
Bearish confirmation means further downside follow-through, such as a gap down, long black/red candlestick, or high volume decline.
To be considered a bearish reversal, there should be an existing uptrend to reverse. It does not have to be a major uptrend, but should be up for the short term or at least over the last few days.
A dark cloud cover after a sharp decline or near new lows is unlikely to be a valid bearish reversal pattern. Bearish patterns within a downtrend would simply confirm existing selling pressure and could be considered continuation patterns.
There are many methods available to determine the trend. An uptrend can be established using moving averages, peak/trough analysis, or trend lines.
Security could be deemed in an uptrend based on one or more of the following:
- The security is trading above its 20-day exponential moving average (EMA).
- Each reaction peak and trough is higher than the previous.
- The security is trading above a trend line.
Types Of Bearish Reversal Patterns
The following are the types of bearish reversal patterns that traders should be aware of, including Engulfing, Harami, and Shooting Star patterns.
1. Bearish Engulfing
A bearish engulfing pattern is a chart formation that occurs at the top of an uptrend and signals a potential reversal in the trend.
It is characterized by a large red candle that completely “engulfs” a small green candle, indicating that bears (sellers) have taken control of the market and that prices are likely to continue to fall.
This pattern is considered a strong bearish signal and traders often use it as a signal to enter short positions.
2. Dark Cloud Cover
The dark cloud cover pattern is a bearish reversal candlestick pattern that appears in an up-trending market.
It is characterized by a long bullish candlestick followed by a shorter bearish candlestick that opens above the close of the previous bullish candlestick but closes below the midpoint of the first candle’s real body.
This pattern indicates that the bears are taking control and the bulls are losing their grip. Traders may use this pattern as a signal to sell or short the security.
3. Shooting Star
A shooting star candlestick pattern is a bearish reversal pattern that appears in an uptrend market. It is characterized by a small real body, with a long upper shadow (wick) and little or no lower shadow.
The pattern forms when the price opens near the high of the period and then declines, but ultimately closes above the low of the candle.
The long upper shadow suggests that the bulls pushed the price up but the bears took control and pushed the price back down. Traders may use this pattern as a signal to sell or short the security.
However, it’s important to note that the shooting star is a bearish pattern, but it needs to be confirmed by other factors before making a trading decision.
4. Bearish Harami
A bearish harami candlestick pattern is a bearish reversal pattern that appears in an uptrend market.
It is characterized by a large real body, which is usually bullish, followed by a smaller real body that is bearish and is located within the vertical range of the previous real body.
The bearish harami pattern indicates a potential trend reversal and a potential change in the direction of the market.
5. Evening Star
An evening star candlestick pattern is a bearish reversal pattern that appears in an uptrend market.
It is characterized by a long white cand stick, a small real body (typically a Doji or spinning top) that gaps up from the close of the previous white stick, and a third black stick that confirms the reversal by opening higher than the small real body and closing below its midpoint.
The evening star pattern is considered a bearish reversal pattern because it indicates that the bulls were initially in control and pushed prices higher, but the bears took control and pushed prices back down.
It’s important to note that these patterns should not be used in isolation to make trading decisions. They should be combined with other analysis such as technical indicators, fundamental analysis, and market conditions.
Additionally, it’s important to wait for confirmation of a pattern before making a trade. This means that traders should wait for a stock to close below the key level of support or resistance before taking a bearish position.
In summary, bearish reversal patterns can provide valuable information for traders by signalling potential selling opportunities.
The head and shoulders, double top, descending triangle, and bearish flag patterns are all examples of bearish reversal patterns.
However, it is important to use these patterns in conjunction with other forms of analysis and to wait for confirmation before making a trade.
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