8 Important Bearish Candlestick Patterns Every Trader Should Know

Typically, bearish candlestick patterns on price movement charts are highlighted in red. Bearish candlestick patterns depict a slow decline in price movements, in contrast to bullish candlesticks, which indicate increased asset prices. Studying these patterns is essential for successful and profitable trading because it enables traders to identify the ideal time to open and sell trades by identifying trends in price movements. The following analysis looks at eight common bearish candlestick patterns.

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What Bearish Candlestick Patterns Tell Us

Let’s examine bearish candlestick patterns, which signal an uptrend that is about to end and may turn into a downtrend after you understand candlestick chart patterns.

There may be one or more patterns in these bearish candlestick patterns. It is important to remember that:

• An uptrend should terminate with the formation of bearish candlestick patterns. If not, it will behave exactly like a pattern of continuation.
• It is advisable to cross-check the reversal signals provided by bearish candlestick patterns with additional indicators like resistance and volume.

Also Read: 8 Bullish Candlestick Patterns: The Ultimate Guide 2023

8 Bearish Candlestick Patterns Every Trader Should Know

Hanging Man

A bearish reversal candlestick pattern known as the “hanging man” has a long lower shadow and a small real body.

This bearish candlestick pattern, which emerges at the end of an uptrend, suggests that the bulls have driven prices higher but are unable to do so any further. It also suggests weakness in the current price movement.

Its tiny real body suggests that there is not much of a difference between the opening and closing prices. There should be no upper shadow and a lower shadow that is twice as long as the body.

The traders can square their buy position and enter a short position with the aid of this pattern.

Here’s an illustration of how the Hanging Man formed on the Nifty 50 daily chart:

Dark Cloud Cover

A bearish reversal candlestick pattern known as “Dark Cloud Cover” is created when an uptrend is coming to an end and suggests that the trend may be weakening.

The bullish and bearish candlestick patterns that make up this pattern are the first and second candlesticks, respectively. This pattern becomes more significant for the downside reversal as prices rise.

An illustration of the Dark Cloud Cover in Sun Pharmaceutical Industries Ltd.’s daily chart is shown below.

Bearish Engulfing

When it emerges at the peak of an uptrend, the bearish engulfing pattern is a bearish reversal pattern that denotes a reversal of the uptrend and a decline in prices as a result of the selling pressure applied by the sellers.

As sellers enter the market and drive down prices, this pattern causes the ongoing uptrend to reverse. Two candles make up the pattern, the second of which is bearish and engulfs the green candle that came before it.

Discover how to use bullish and bearish engulfing patterns in your trading.

An illustration of the Bearish Engulfing pattern from Reliance Industries’ daily chart is provided below:

The Evening Star

A candlestick pattern known as an “evening star” is used by traders to predict when an uptrend will end and a downtrend will begin.

Three candlesticks make up this pattern: a big, bullish candle, a small, bearish candle, and a small, bodied candle. At the apex of an upward trend, evening star patterns emerge, indicating that the trend is about to change to a downward one.

An illustration of the Evening Star pattern that developed in the Nifty 50 chart is shown below:

The Three Black Crows

A multiple candlestick pattern called the “Three Crows” is used to forecast when an uptrend will reverse into a downtrend. It develops when sellers apply bearish pressure, causing prices to drop for three straight days.

After the bearish candlestick pattern forms, traders can enter a short position. To verify the formation of this candlestick pattern, traders should use volume and technical indicators.

Here is an illustration of a Phillips Carbon Black Ltd. daily chart using the Three Black Crows Candlestick pattern:

Shooting Star

A bearish reversal pattern resembles a shooting star. It implies that these patterns point to a probable shift in the direction of price. The short body and long upper wick of a shooting star signify that an initial upward trend in price movement ultimately turned downward.

A shooting star typically emerges during the peak of an uptrend, when the asset starts high and continues to move higher until closing close to the open price. A shooting star indicates that the sellers were still able to drive down prices despite the interest and demand from the buyers.

Tweezer Top

Another 2-candle bearish pattern is a tweezer top. On price charts, a tweezer top is easily identified because two candlesticks occur back to back and have nearly identical highs. The first candlestick in the pair is bullish, suggesting that bulls have succeeded in pushing prices higher, whereas the second candlestick is bearish, indicating that bears have succeeded in pushing prices lower. This is how they differ from one another.

This pattern indicates that asset prices have reached their peak at that specific moment and that buyers are unwilling to purchase additional assets at that price. For this specific asset, the chart indicates the beginning of a natural downward trend in price movement.

Shrinking Candles

A pattern of shrinking candles is made up of several candlesticks, each smaller than the one before it, which causes the price movement to reverse. The imbalance between the asset’s supply and demand is the cause of this; when many sellers are seeking to offload an asset and few buyers seeking to acquire it, the asset’s price will inevitably decline. As the size of the bullish candles shrinks, it is a sign that prices are going down, so shrinking candles can help predict this outcome.

The Bottom Line

In technical analysis, a bearish candlestick pattern is an essential tool that helps traders anticipate a possible reversal in an upward trend. Still, these patterns need more bearish confirmation. It’s also critical to keep in mind that each one should emerge within an already-existing uptrend. They are a great tool for spotting short-term reversals, but like all technical analysis tools, they work best when combined with resistance, momentum, and money flows. Knowing these patterns can greatly improve your trading strategy and assist you in making more informed trading decisions, especially when combined with other market indicators and trends.

Frequently Asked Questions (FAQs)

1. What are bearish candlestick patterns?

Bearish candlestick patterns are formations on price charts that indicate potential market declines in the future. They provide visual cues about the state of the market and potential price movement, suggesting that there’s a strong likelihood that the asset’s price will decline.

2. What is the trading three-candle rule?

The bullish reversal pattern known as the “three inside up pattern” consists of a large down candle, a smaller up candle enclosed in the previous candle, and then another up candle that closes above the close of the second candle.

3. What criteria must be satisfied for a pattern to be deemed a bearish reversal?

There must be an uptrend or upward swing to reverse for a pattern to be deemed a bearish reversal. The pattern usually needs more bearish confirmation, and it should form within a rising trajectory. To verify the pattern, additional technical analysis techniques should be applied.