Down Trends and the Bearish Engulfing Signal

What goes up in Forex trading often comes down again. The ability to successfully anticipate changes in Forex currency rates such as the reversal of a bull market can be profitable. With this though in mind let us look at down trends and the Bearish Engulfing Signal. The Bearish Engulfing Signal is a technical trading signal found in the Japanese candlestick system. These centuries old trading signals are used today to trade stocks and commodities as well as currencies. When a currency such as the Yen rises against the Euro there are fundamental reasons such as a weak balance of payment, high unemployment, or excessive national debt. However, technical traders can often successfully anticipate market changes before the fundamentals are clear. Because price patterns in equity markets tend to be repetitive technical traders can trade off a sense of market sentiment. This is the connection between down trends and the Bearish Engulfing Signal.

What is the Point of Trading Forex with Candlesticks?

The point of using clear and easy to read candlestick signals is that they tend to provide an advantage in trading and that advantage tends to lead to profits. These signals have been in use since rice traders invented them in Japan in the days of the samurai. Traders need to be versed in the fundamentals of the currency pairs that they trade but they also need to keep an eye on what the rest of the market is thinking. Down trends and the Bearish Engulfing signal are strongly related and even the most fundamental-based trader will be wise to pay attention when the Bearish Engulfing Signal shows up on his stock charts.

What is the Bearish Engulfing Signal?

So, we know that there is relationship between down trends and the Bearish Engulfing Signal. But, what is this signal? It is a pair of Japanese candlesticks. The second extends higher and lower on the stock chart than the first. That is, second engulfs the first. This signal occurs at the end of a well established bull market for one currency versus the other. That fact is essential to reading the Bearish Engulfing Signal. The first day is an up day so the candle is white. The second day is a down day so the candle is black.

What is Happening when We See the Bearish Engulfing Signal?

The price of a currency is rising for a well defined period. It comes to a day in which it rises but not significantly. The next morning the currency gaps up, which might make us believe that the rally will continue. It may even trade higher for a time than its opening price. However, for the rest of the day the equity will fall significantly. It may recover some but it will close well below the opening price of the previous day, erasing gains from the previous day’s trading and more. To confirm that down trends and the Bearish Engulfing Signal are related it is essential that the signal occur in a well defined up trend. If the second day candle extends above and below the shadows of the previous day it shows us that the currency fell much more significantly and this is an even stronger indication that the currency will now go into bearish mode.

A Caveat: There is a Candlestick signal called the Doji. This is a very flat candle and has its own meaning in predicting price movement. Virtually any subsequent candle will be longer that the Doji. Although one can anticipate Forex market reversal with the Doji, beware of this situation as it has nothing to do with down trends and the Bearish Engulfing Signal.