What are the characteristics of the bearish engulfing formation?

• Formation is made up of two candlesticks.
• The first candle is a white candlestick which continues the increase trend.
• The second candle, which is a black candle has an opening price above the previous candlestick closing price, and a closing price under the previous candlestick opening price; i.e. the black candlestick covers the whole previous candlesticks body.
• Appears on bottoms and signals trend reversal.

Examples:

As with all candlestick formations, these also provide us with significant support (bullish engulfing) and resistance (bearish engulfing) levels. What should be kept in mind is that support and resistance levels are also met at the 50% level of the second candlestick. Many successful investors build their stop loss strategy depending on the candlestick formation they encounter. If it is a pro increase formation than the stop loss is set one pip beneath the formation, whilst if it is a pro decrease formation than the stop loss is set one pip above the formation. Sometimes setting the stop loss may seem too far, and the risk undertaken would just be too big. What could be done in such situations? One method is to move the stop loss if possible to a closer support or resistance level, which is possible after the engulfing formations. Another possible outcome, is not opening a position at all.

Lets, take a look at two examples:

1. This is a major bullish engulfing, but there could be a problem with setting the stop loss. What investors should remember is that, as long as their expected profit is a few times higher than the possible risk than there is no problem in opening a position.
2. Typical bearish engulfing.

Which formations are found in the pink rectangles?

1. This is not a black cloud cover because the second candle does not break through 50% of the first candle.
2. This is not a black cloud cover due to the fact that the whole first candle is covered. This formation also signals the power of the bears and will be discussed in the next presentation.
3. This is also not a piercing line formation due to the fact that the whole first candle is covered.