When you decide to start trading, relying on intuition and general understanding of the market is often not enough. You also need to be able to analyze price charts and draw your own conclusions from them. One of the most descriptive charts is a candlestick chart.
Candlestick patterns show the price movement of an asset within a certain timeframe. As a rule, a candlestick shows four prices of an asset: the opening price, the closing price, the high price and the low price.
There are multiple types of candlesticks, but they all show either bullish or bearish price movements.
What Bearish Candlesticks Tell Us
Bearish candlesticks are usually colored in red on price movement charts. Unlike bullish candlesticks that show the increase of asset prices, bearish candlestick patterns show the gradual decrease in price movements. Recognizing these trends in price movements helps traders to find the best moment to open sell trades, so it’s important to study these patterns for successful and profitable trading. There are eight typical bearish candlestick patterns, which are examined below.
Shooting Star
A shooting star is a bearish reversal pattern. It means that such patterns indicate a likely change in price direction. A shooting star has a short body and a long upper wick that indicates that an upward trend in price movement in the end turned downwards.
Typically, a shooting star appears at the height of an uptrend, when the asset opens high and keeps trading higher, but at the end falls down and closes near the open price. A shooting star shows that, despite the buyers’ interest and demand, the sellers still managed to push the prices down.
Shooting Star Example
As we see from this chart, a shooting star appears at the height of an uptrend. But the subsequent rejection of the price by sellers indicates the start of a new downward trend. So we can conclude, that a shooting star is likely a sign that asset prices are about to go down.
Bearish Engulfing Crack
Unlike the previous pattern, bearish engulfing pattern consists of two candlesticks. The first candlestick is bullish and shows that the closing price is higher than the opening price and buyers are in control of the prices. The second candlestick, on the contrary, is bearish. It completely overshadows the bullish counterpart and indicates that on this day sellers prevailed over buyers and pushed the price down.
Although this pattern is bearish, it does not necessarily signify a complete reversal in price movement. Prices can continue to go down and you can safely short your assets. Or they can climb up and disrupt your trading. So before committing to a decision, you shouldn’t look at this pattern in isolation. Instead, look at the bigger picture: is the price of this asset on an upward or a downward trend? The answer will help you make the right decision. If a bearish engulfing formed after an upward correction in a bigger downtrend and near a big resistance level, the odds are that the sell signal is reliable.
Bearish Engulfing Example
On this chart you can see how after a slight rise in price the bullish candlestick is immediately followed by a bearish one that completely engulfs it. This bearish engulfing pattern is followed by immediate price decline that falls in line with the general downward trend of the asset prices.
Evening Star
An evening star is another bearish pattern indicating the possible reversal of a price’s uptrend. A typical evening star consists of 3 candlesticks. The first candlestick is bullish and shows a steady and fast increase in prices. The second candlestick is very short due to the decreased demand for the asset and slow increase in prices. Unlike the first two, the third and last candlestick of the pattern is bearish: the opening price on the third day is noticeably lower than on the second day and closes even lower. This candlestick indicates that on the third day it is the bears who have the upper hand, so the prices start to lower.
Evening stars are considered quite reliable markers of a continued downtrend in price movement.
Evening Star Example
This chart illustrates a typical evening star. The price of the asset is growing slowly, but surely, when it suddenly spikes, then evens out, and just as suddenly decreases, signaling a new downtrend in price movement.
Tweezer Top
A tweezer top is another 2-candle bearish pattern. A tweezer top is easily recognizable on price charts as both candlesticks have almost identical highs and occur back to back. The difference between them is that the first candlestick of the pair is bullish, indicating that bulls have managed to lift the prices up, while the second candlestick is bearish, showing that bears have pushed the prices down instead.
This pattern shows that asset prices have reached the highest point possible at that particular time and that the buyers are not willing to buy any more of the asset for an even higher price. This chart shows the start of a natural downtrend in price movement for this particular asset.
Tweezer Top Example
As we can see on this chart, a tweezer top is a pattern that occurs near the top of the uptrend with a bearish candlestick following a bullish one at approximately the same height. After the tweezer top, the price begins to decline because the bears continue to influence the asset price the most.
Dark Cloud Cover
A dark cloud is another bearish candlestick pattern that potentially predicts the reversal of price movement. A dark cloud consists of two candlesticks: a bullish candlestick and a bearish one that opens higher than the previous candle and closes near its midpoint. This pattern shows that during the second day buyers have actually managed to push the prices higher, but in the end sellers quickly took over and pushed them down.
Despite the fact that a dark cloud is considered a bearish pattern, it’s not exactly foolproof. You need to identify a clear uptrend to be sure that a dark cloud predicts the downturn in price movement.
Dark Cloud Cover Example
This chart shows how a dark cloud can actually be interpreted as a sign of an impending downturn. You can clearly see that the asset prices are on an uptrend. Then, a bullish candlestick is suddenly followed by a bearish one that opens higher but closes at the middle of the previous candlestick. This pattern is further followed by a series of bearish candlesticks, indicating the start and continuation of a new downtrend.
Shrinking Candles
A shrinking candles pattern includes multiple candlesticks, each of them smaller in size than the previous one, resulting in a reversal in price movement. The reason behind this is the imbalance between the demand and the supply of the asset: when a lot of sellers want to sell one asset and not a lot of buyers are looking to buy it, the price of this asset will inevitably fall. Shrinking candles can help predict this outcome as the shrinking size of the bullish candles indicates the decrease in prices.
Shrinking Candles Example
On this chart we can see the way a bullish candlestick is followed by two much shorter candles, culminating in a bearish candle with a closing price lower than the second candle’s low. This shows how, despite all the efforts made to push the price higher, the sellers manage to counter them and change the trajectory of the price movement.
Hanging Man
A hanging man is a bearish candlestick pattern that indicates a moderately high probability for price decrease. This pattern actually consists of one candle with a short body and long wick. The body is located at the top of a candle’s range. The pattern can be both bullish and bearish and usually appears at the top of an uptrend. A hanging man shows that there’s a very noticeable selling pressure on the asset, which turns the price movement downward. However, a hanging man is not the most reliable indicator of reversals in prices, so it’s important to look for other signs to reinforce your prediction.
Hanging Man Example
This chart illustrates a steady increase in asset prices, but a short candlestick with a long wick suddenly appears at the end of the uptrend, changing the course of the price movement and starting a new downtrend. As it is, it’s important to act quickly when you see this pattern, but do look at the bigger picture of current changes in asset prices.
Three Black Crows
Three black crows is another bearish pattern that indicates the possible reversal of price movement. As you can guess from the name, this pattern consists of three (often long-bodied) bearish candlesticks that open higher than the previous candle, but close much lower. This pattern shows that sellers have managed to push the prices of assets down three times in a row and now overtook buyers.
Three black crows is a very noticeable bearish pattern, but it’s still necessary to use other technical indicators to confirm that it really does predict a downturn in asset prices.
Three Black Crows Example
This chart shows a slow, but steady uptrend with very few bearish candlesticks sprinkled here and there. That is, until we encounter three bearish candlesticks with very short wicks, closing far below each other. Afterwards, the price movement took a downturn, indicating that the three black crows pattern is actually a pretty reliable indicator of a price decrease.
How To Practice Candlestick Patterns
In trading, simply knowing the names of candlestick patterns isn’t enough. Good traders can also quickly spot these patterns and make decisions that bring them more profit based on these patterns. Of course, successfully applying your knowledge about bearish candlesticks requires some practice. There are multiple ways new traders can practice their candlestick-spotting skills:
- study previous data – you can pull up the charts for any date of any year and try to find bearish patterns on your own to get some training;
- analyze the market – it’s important to understand what market conditions can lead to a reversal in the price movement and how bearish candlesticks are formed under such conditions;
- use demo accounts – if you’re new to trading, using a demo account is a must. Besides teaching you the basics of trading, they are also a good place to practice candlestick patterns and what you should do when they occur.
Key Takeaways
In this article we learned that bearish candlestick patterns are very useful for forecasting when the asset price is about to start decreasing. Bearish candlesticks indicate that at one particular moment it is the sellers who control the asset prices, so recognizing these bearish patterns is useful for sellers looking to open sell trades. So if you want to maximize your profits, look for these patterns in candlestick charts, analyze the market conditions, and be sure to act as quickly as possible!
