scorecardresearchAll you need to know: Five bearish candle patterns for trading in the stock

All you need to know: Five bearish candle patterns for trading in the stock markets

Updated: 04 Jul 2022, 08:07 AM IST

Bearish candlestick patterns imply negative price movement when sellers exert pressure on buyers when selling pressure overcomes purchasing demand. We discuss five commonly known bearish candlestick formations.

Types of Bearish Candlestick Patterns

Types of Bearish Candlestick Patterns

For years, traders have utilised candlestick patterns, a type of technical trading technique, to forecast price movement. There are several patterns that are labelled as bearish. Bearish candlestick patterns predict negative price movement when sellers apply pressure on purchasers and selling pressure outweighs purchasing demand. There must be an upswing already in place for the reversal to be viewed as bearish. It doesn't have to be a significant increase, but it should have been upward in the recent days or at least during the near term. We can identify downturns and execute appropriate positions using bearish candlestick patterns.

A bearish reversal pattern that involves a heavy cloud cover after a significant loss or close to new lows is unlikely to be accurate. A downtrend's bearish reversal patterns would only reaffirm the current selling pressure and may be categorised as continuation patterns.

Types of Bearish Candlestick Patterns

Bearish Engulfing Pattern

The bearish engulfing pattern is considered as one of the most evident indicators of a price cut action signal. It is depicted by a green candlestick that is followed by a red candlestick which overtakes and nearly engulfs the green candlestick in size. It is an indication that the market's buyers are not being outperformed by sellers and trading behaviour patterns are changing.

The Bearish Engulfing Pattern, may appear after a sustained market uptrend and may be a sign that the bullish market is about to turn bearish. The stock must begin much higher than the previous close for a bearish engulfing pattern to develop. Additionally, the bearish candle's closing needs to be higher than the bullish candle's opening.

As a result, traders expect prices to be moving upward before the bearish engulfing pattern forms. The bulk of traders book profits when the share price is in close proximity to the resistance level. With less buying pressure and more selling pressure, the bears take control of the stock market and drive it down, forming the bearish engulfing pattern.

Dark Cloud Cover Pattern

One green candle, which is a member of the dominant upward trend, and one red bearish candle, which originates in the uptrend but closes below the midpoint of the preceding candle, join together to produce a dark cloud cover pattern. It might signal a change in the direction of the trend.

This bearish candle emerges in an upswing and opens above the preceding bullish candle. As a result, the price eventually closes below the midpoint of the bullish green candle, indicating that negative forces ultimately prevailed after early buyer control of the market and driving the price upward. It is valid if it only appears in an upswing since it is a bearish indicator.

Additionally, the created candles must have a big body. Short-bodied candles are frequently neglected because they lack the potential strength to cause a shift in momentum. Thirdly, the pattern is more notable when the bearish candle closes below the green candle's midway, especially without any shadows.

Hanging Man Pattern

A bearish reversal candlestick pattern known as the "hanging man" typically indicate a change in market attitude about a stock, and as a result, there is no longer any upward momentum for the price. It indicates that investors' interest in the investment is decreasing and that they may be getting ready to sell, which would drive down the price.

The hanging man pattern is said to feature a large bottom shadow and a little true body. This candlestick pattern, which comes near the end of an uptrend, signals weakness in future price movement. It develops when the bulls have pushed the prices upward but are no longer able to do so. Since the actual body of this candlestick chart pattern is rather tiny, there is very little margin between the starting and closing prices.

Evening Star Pattern

An approaching decline is predicted by the candlestick pattern known as the "Evening Star," which develops at the peak of an uptrend. It serves as a warning sign to traders that the rise is about to come to an end and that it is time to lock in profits.

It comprises three candlesticks- a large bullish candlestick, a small bodied candle, and a bearish candlestick and the pattern takes three days to develop. On the first day, a giant white candle indicating a steady price increase will be visible; it will be followed by a smaller candle indicating a noticeably slower price increase. A giant red candle with an opening price lower than the second day and an ending point close to the middle of the first day will mark the third day.

The long white candlestick shows that there is still significant buying pressure and that the trend is upward. Further indication of ongoing purchasing pressure is shown when the second candlestick gaps higher. After the gap, the rise, however, stops or considerably slows down, signalling uncertainty and a potential trend reversal. Chances of a reversal rise if the little candlestick is a doji. The third long black candlestick serves as bearish confirmation of the reversal.

Three Black Crows

The three black crows pattern is a bearish reversal pattern that alerts to a possible downtrend reversal as well as weakness in a continuing upswing. It should only be taken into consideration when it emerges after an upswing since it is a bearish reversal pattern.

Three long-bodied candles make up this pattern, which often develops during an upswing and causes a downward drop. Each of these candles has an opening within the body of the one before it and a lower closing. On a chart, it looks like a staircase. It signals the beginning of a downturn and the conclusion of a positive trend to traders. The candles' lengthy bodies and short shadows suggest that bearish forces were successful in driving the market lower, since they closed close to the bottom.

Market participants are drawn to candlestick patterns, but many of the reversal and continuation signals that these patterns emanate don't consistently function in the current technological world. They should thus be used properly with other technical indications.

First Published: 04 Jul 2022, 08:07 AM IST