How to Read Bearish Candlestick Patterns for Stock Trading

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Contributor, Benzinga
February 9, 2023

Though they originated from the Japanese rice trade centuries ago, candlesticks have made their way into modern-day charts. Their ability to convey much information in a simple diagram and ease of interpretation has made them a preferred choice for traders. Candlestick formations can provide valuable insights into price movement, including uptrends, downtrends, continuation patterns, reversal patterns, and more.

Bearish candlestick patterns come in different forms that tell traders about the price action of a security. One such candlestick pattern is the bearish candlestick pattern. This article will look at the different types of bearish candlestick patterns and how to use them when trading securities.

A bearish candlestick forms when the closing price for the period is lower than the opening price. This is different from a bullish candlestick where the closing price for the period is higher than the opening price. Periods on the candlestick chart may be one minute, five minutes, 15 minutes or one hour, depending on the time frame used by the trader.

Bullish candlesticks are usually hollow/white or green and indicate buying pressure. Bearish candlesticks are black or red and are used to indicate selling pressure. Bearish candlestick patterns usually form after an uptrend and may signal a point of resistance or price reversal. Uptrend candlestick chart patterns usually form after an uptrend and may signal a point of resistance or price reversal.

11 Examples of Bearish Candlestick Patterns

There are various types of bearish candlestick patterns, with each conveying a different signal to the trader. Take a look at the various types.

1. The Shooting Star

A shadow (wick) is a line found on a candle in a candlestick chart. It is used to show the price fluctuations of a stock relative to the opening and closing prices within a period. The shadow is different from the main body, which is wider and boxlike.

Shooting stars have a long upper shadow, little or no lower shadow and a small real body near the low of the day.

A shooting star candlestick forms when a security opens, advances higher but then closes near its opening price at the end of the period — just like a star falling.

2. Dark Cloud Cover

A dark cloud cover is a bearish candlestick pattern in which a bearish candlestick (black or red) opens above the close of the prior bullish candlestick (white or green) and then closes below the midpoint of the bullish candlestick. The close below the midpoint of the prior bullish candlestick indicates a shift in price action from buying to selling.

Experienced traders look for a confirmation of selling pressure in the third candle stick, which is usually shown by a lower opening and closing price from the first two candlesticks.

3. Bearish Harami

A bearish harami pattern consists of a long bullish (white/green) candle followed by a smaller bearish (black/red) candle. The smaller bearish candle is usually less than half the size of the longer bullish candle.

As such, the opening and closing prices of the second bearish candle are contained within the range of the larger bullish candle. The size of the second bearish candle indicates the strength of the reversal. The smaller the bearish candle, the higher the chance there is of a bearish trend.

4. Hanging Man

The hanging man is a single candlestick pattern that’s illustrated by small bodied candlestick and a long or short tail.

The opening and closing prices of the hanging man are close to the top of the preceding bullish candlestick. The real body of the hanging man can be bullish (white or green) or bearish (black or red), but it must be small. The size of the shadow (wick) is irrelevant. The small body size indicates that buyers are losing momentum, and a shift in price action is imminent.

5. Bearish Engulfing Pattern

The bearish engulfing candlestick pattern consists of a bullish (white or green) candlestick followed by a longer bearish (black or red) candlestick that is longer than the preceding bullish candlestick.

The longer bearish candlestick indicates that sellers have taken over and are aggressively pushing the price of the security lower.

Experienced traders usually wait for a third candle for confirmation of a bearish trend. It is usually shown by a lower opening and close from the second (bearish engulfing) candle.

6. The Evening Star

The evening star pattern consists of a large bullish candlestick, a small-bodied bullish or bearish candle and a large bearish red candle. The length of the different candlesticks shows variations in the strength of buyers and sellers.

A large bullish candlestick shows that buyers have momentum. The smaller-bodied candlestick that follows shows that buyers are losing control. If it is green, it indicates that buyers still have some control, though they have lost momentum. If it is red, it shows that sellers have gained control but not sufficient enough to force prices lower.

The last larger bearish candlestick indicates that sellers have gained full control and are pushing prices lower.

7. Falling Three Methods Pattern

The falling three methods pattern is characterized by a series of smaller-bodied candlesticks (bullish or bearish), followed by a larger bearish candlestick, then another series of small-bodied candle sticks (bullish or bearish), followed by another larger bearish candlestick.

At first glance, it may look like sellers and buyers are struggling for control, but the larger price action shows a downtrend. The small-bodied bullish or bearish candlesticks show that buyers do not have enough conviction to take control. This is followed by a larger bearish candlestick that shows sellers have gained control, sending prices lower.

8. Three Black Crows Pattern

Three black crows are made up of three consecutive large bearish candles with usually short shadows (wicks) after a bullish uptrend. This engulfing pattern shows increasing selling pressure illustrated by a lower closing price on each candle.

The short shadows (wicks) and consecutive bearish candles indicate that sellers are able to maintain pressure and send prices lower for a sustained period. The strength of the sellers is also confirmed by the large size of the candles, which are usually the same size. The three black crows is typically one of the surest signs of a downtrend in a candlestick chart.

9. Tweezer Top

The tweezer top candlestick pattern consists of two candles where the first candle is bullish, while the second candle reflects more bearish sentiment as the price action inches lower.

The first candle is usually large, but the second candle can be any size. The premise behind this is the first candle shows a strong upward move, which indicates that buyers have firm control. In contrast, the second candle reverses the movement of the first candle, indicating that sellers are beginning to gain control but not sufficiently enough.

Experienced traders use other technical indicators like the relative strength index (RSI) and Stochastic oscillator to help confirm a bearish trend because using tweezers alone can be misleading.

10. Shrinking Candles

Shrinking candles are a bearish reversal candlestick pattern that indicates shrinking trading volume or momentum. The shrinking of the bodies indicates that buyers cannot sustain the upside movement and sellers are gradually taking over, which makes the bodies of the candles become smaller. The appearance of a large bearish candle after a small bullish candle confirms price reversal and that sellers are now dominant. The engulfing pattern confirms the trend reversal and marks a significant shift in market sentiment.

11. Money Flows

Money flow is a momentum indicator represented based on the price and trading volume of a security. It is obtained by taking an average of the high, low and closing prices and multiplying it by the daily volume. Candlestick formations are used to analyze price movement and identify bullish engulfing, doji, spinning top, morning star, piercing line, and other candle patterns that signal uptrends, downtrends, trend reversals, or continuation patterns.

Positive money flow is when the line crosses the midpoint on the indicator. This represents buying or accumulation of the security. Likewise, a negative money flow is when the lines of the indicator are below the midpoint. This represents the selling or distribution of the security. The midpoint is usually the average price of the security for a given period. Candlestick formations can provide valuable insights into price movement.

Learn More About Bearish Candlestick Patterns

You can learn more about these candlestick patterns, such as the engulfing pattern, by taking a hands-on approach. This can be done by opening a trading account and putting your knowledge of candlestick patterns to use to see which best suits your trading style.

Let Candles Light the Path of Your Trades

The best way to develop your skills in technical analysis is to practice reading and interpreting charts. Understanding bearish candlestick patterns is a crucial component of that. The different candlesticks highlighted above give you specific information about market momentum and direction. Consider using technical indicators in combination with your chart readings to make your predictions on stock market trading.

Frequently Asked Questions

Q

How many different bearish candlestick patterns are there?

A

There are at least a dozen different bearish candlestick patterns.

Q

Do bearish candlestick patterns work?

A
Bearish candlestick chart patterns can be a helpful tool as part of your overall research when deciding on your investing approach. But they are best used when combined with other technical indicators such as a downtrend, engulfing pattern, doji, or morning star.
Q

Which bearish candlestick pattern is the most reliable?

A

Though traders tend to prioritize certain bearish candlesticks over others, no bearish candlestick is most reliable in all cases.

About Anna Yen

Anna Yen, CFA is an investment writer with over two decades of professional finance and writing experience in roles within JPMorgan and UBS derivatives, asset management, crypto, and Family Money Map. She specializes in writing about investment topics ranging from traditional asset classes and derivatives to alternatives like cryptocurrency and real estate. Her work has been published on sites like Quicken and the crypto exchange Bybit.