Bearish Candlestick Patterns: Meaning and Types

Candlestick patterns are a very important tool for technical analysis. In the last chapter, we got to know about several bullish candlestick patterns and the kind of strategies you should use if you spot one. While a bullish trend gets the buyers excited, it is also important to watch out for a bearish trend to save yourself from losing money!

In this chapter, we will talk about different bearish candlestick patterns and how you should bring changes to your investment strategies when you spot one. The only way you can learn how to read these patterns is to actively invest and sell stocks with a small amount. However, it is important to know that you cannot use any kind of candlestick patterns in isolation. You need to bundle them up with other technical analysis tools to ensure that you make a sound investing decision. 

Now, let’s have a look at a few commonly occurring bearish candlestick patterns. 

Single Candlestick Bearish Patterns 

You are most likely to find a bearish candlestick pattern at the end of an uptrend. These patterns are considered to be a point of resistance, as the market starts to get pessimistic from here. It is that time when investors close their long positions but open the short ones to benefit from the decline in prices. 

There are a few single-candlestick bearish patterns you must know about before you start trading in the stock market. These patterns are discussed below.

Hanging Man

The hanging man works like a hammer, but the market trend is bearish. It has the same shape as the hammer - a small body and a larger bottom wick. You will find this single candlestick at the end of an uptrend. 

The candlestick occurs when a significant sell-off happens during the day but the buyers push the price up again. However, they are unable to push the prices up beyond a certain price and hence, the price closes below the opening price. The increased number of sell-offs is an indication of the market turning bearish. 

Shooting Star

The shooting star is another important single bearish candlestick pattern. It is usually formed at the end of an uptrend and is an indicator of a bearish reversal. Unlike the hanging man, the shooting star has a long upper wick, and the body is at the end with no bottom shadows. 

As the name suggests, just like a shooting star, it falls from the heights of a heavenly price. It closes at a price just before the opening price, forming this pattern. Here, the price goes up only to fall back. 

Two-Candlestick Bullish Reversal Patterns 

Once you get an idea of how single candlestick patterns work, it is important for you to also understand the two-candlestick bullish patterns. Let’s check them out!

Bearish Engulfing

Bearish engulfing candlestick pattern is an important indicator of a bullish market. It is formed using two candlesticks and you will usually find it at the end of an uptrend. Here, the first candle is green and has a small green body which gets engulfed by a slightly larger red candle. 

The pattern showcases a peak followed by a slowdown in the stock prices. It is an indicator of a market downturn. You also need to check the position of the candle to ascertain the trend. The lower the second candle goes, the trend becomes stronger. 

Bearish Harami

This candlestick pattern is a bearish version of the bullish harami. You will spot it after an uptrend as it signals a bearish reversal. It has two candles: a bullish green long candle followed by a small bearish red candle. However, the range of the red candle is restricted to that of the green candle. 

While the green candle showcases a bullish trend, the red one shows a reversal of the trend and the market becoming bullish. The bearish nature of the market is dependent on the preceding trend.

Dark Cloud Cover

The dark cloud cover is an indicator of a bearish reversal. The pattern makes use of two candlesticks to show an upside followed by the entry of the bears into the market. You will find this pattern at the end of an uptrend. 

Here, a bullish candle showcases a continuation of the upward trend, followed by a red bearish candle that closes at more than 50% of the previous candle’s body. The red candle opens above the closing price of the green candle, but it then closes below the midpoint of the green candle, showcasing a bearish reversal and creating a dark cloud. 

Three-Candlestick Bullish Continuation Pattern 

If you are looking for a bearish continuation pattern, you need to look out for three candlestick bullish continuation patterns. These patterns will give you an understanding of the price trend that is likely to follow. 

Let’s look at some of the three-candlestick bullish continuation patterns and understand what contributes to their formation. 

Evening Star

The evening star is a bearish equivalent of the morning star. It is a three-candlestick pattern that is formed when a short candle or doji is sandwiched between a long green candle and a long red candle. 

The candlestick pattern showcases a reversal of an uptrend, where the third red candlestick causes the earnings of the first green candle to diminish. The first candle showcases an upward trend, followed by a doji, which brings in market indecision. The Doji is followed by a red candle, showing that the bears are coming and the reversal of the market is here to continue. 

Three Black Crows

The three black crows, as the name suggests comprise three consecutive red candles. These candles have large bodies with short or no shadows. The three consecutive red candles show how every session opens at a similar price as the day before but due to a high selling pressure, the price is driven even lower with every close. 

Traders look at this batten as the beginning of a bearish trend as the quantum of sell-offs overtake the buys for almost three consecutive days. However, you need to consider the volume and other technical indicators to ascertain a market downturn. 

Bearish Candlestick Patterns in Trends

As an investor, you will come across several bearish candlestick patterns while trading on the stock market. If you have a fair understanding of how bearish candlesticks work, you will be able to understand the market downturn and the return of the bears in the market. 

Most bearish candlesticks can be found at the end of an uptrend, signalling a reversal in the trend. If you are on to a buying strategy, a bearish candlestick pattern will suggest you to reverse your technique. However, you might choose to open a small position to benefit from the falling prices. 

Trading Strategies with Bearish Candlestick Patterns

There are different strategies that you can experiment with while trading bearish candles. You can choose to take a short position when the price goes down below the low of the red candlestick. You can also choose a stop-level close above the high of the candlestick. 

Shooting Star: Here, the candle is forming, and hence, the traders might anticipate a reversal of the trend. You can choose to wait until the close of the shooting star and then enter the trade. You can then put a stop at the high of the shooting star candle. 

However, you must try to use other technical indicators, too, before you execute the strategy. 

Bearish Engulfing: Several aggressive traders might enter the trade during the candle formation if they can see the supply. However, to play safe, you might choose to wait till a new low is confirmed. You can choose to put a stop at the high of the candle or anywhere in the body, depending on the range. 

Evening Star: You can choose the risk off the high of the sandwiched candle and enter the trade. This pattern might work well at the high of the day before the trend starts to reverse. 

Conclusion

Trading bearish candlesticks need experience and practice. Also, using them in isolation can pose a risk. You should try to use them along with other technical analysis tools. Most bearish candlesticks are a result of an increase in the selling pressure. These patterns suggest a future decline. Hence, you must try to anticipate the price movements before you make any investment decision. 

We have taken you through the important bearish candlestick patterns. In the next chapter, we will try to understand the concept of bullish and bearish marubozu with some real-life examples. Stay tuned!