when acting on this pattern traders typically initiate a short position after they ve confirmed the bearish signal setting a stop loss above the highest point of the engulfing candle potentially curtailing a financial setback alternatively to save any gains as the price decreases some traders employ a trailing stop an order set at a percentage or dollar amount below the market price which adjusts as the price increases ensuring gains are locked in 21
however it s worth noting that as with all trading strategies there s no guarantee of success the bearish engulfing pattern can be misleading this is why traders consider a stop loss crucial if the pattern fails traders can then re evaluate the market conditions a failed bearish signal could indicate underlying strength in the asset and it isn t the right time to go short 12a setup that doesn t pan out can be emotionally taxing investors and traders find it best then to stick to a well defined plan and not let emotions dictate actions 2the pros and cons of using the bearish engulfing patternearly warning systemsimple to identifyhighly versatilerisk managementstronger confirmationfalse signalsdepends on contextlagging indicatorrequires confirmationemotional pitfallsthere are benefits and disadvantages to using the bearish engulfing pattern as a signal in trading 4benefits drawbacks the bearish engulfing pattern offers several benefits such as ease of identification and versatility across markets however it also has limits like the potential for false signals and the need for additional confirmation understanding the pros and cons of this pattern could help traders use it more effectively as part of a balanced trading strategy an example of the bearish engulfing patterntradingviewin this scenario a bearish engulfing pattern appeared on apple inc s aapl daily chart backed by a bearish crossover in the rsi and its five day moving average following these signals the stock had a 3 4 decline if you were considering a short position on aapl at the time this appeared you might have used the following strategy of course this is just an illustration of how the pattern can help guide trading you should conduct thorough backtesting and risk assessment before incorporating such patterns into your trading strategies investment decisions should ideally be made with the assistance of a financial advisor 