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Recently, we discussed the general history of candlesticks and their patterns in a prior post. We also have a great tutorial on the most reliable bullish patterns. But for today, we’re going to dig deeper, and more practical, explaining 8 bearish candlestick patterns every day trader should know.
We’ll cover the following:
- What these patterns look like
- The criteria for confirming them
- The story these candles tell
- How to set entries and risk for each
- Some common mistakes when interpreting them.
Also, feel free to use our quick reference guide below for bearish candlestick patterns! Be sure to save the image for your use with your trading and training in the market!
What Bearish Candlesticks Tell Us
Hopefully at this point in your trading career you’ve come to know that candlesticks are important. Not only do they provide a visual representation of price on a chart, but they tell a story.
Behind this story is the belief that the chart tells us everything we need to know: the what being more important than the why. Each candlestick is a representation of buyers and sellers and their emotions, regardless of the underlying “value” of the stock.
Bearish candlestick patterns typically tell us an exhaustion story — where bulls are giving up and bears are taking over. Many of these are reversal patterns.
Check out or cheat sheet below and feel free to use it for your training!
Without further ado, let’s dive into the 8 bearish candlestick patterns you need to know for day trading!
1. The Shooting Star
In case you were wondering, the names of candlestick patterns usually describe a visual representation to something in real life. The Japanese were fond of naming them that way.
The shooting star is no exception.
When it occurs, it will be at the height of a current uptrend — typically an extended trend.
It’s a lot like a shooting star falling from the heights of the heavens.
At the end of that trend, the stock experiences one last effort to push higher, only to reverse on itself. Hence the name, shooting star.
It goes up, only to fall back.
Entry
Where would you enter?
More aggressive traders may anticipate the reversal as the candle is forming. Otherwise, you can wait until the close of the shooting star, enter, and set your stop at the high of the shooting star candle.
Shooting Star Example
AMC provides a great example of this pattern during a recent intraday session. Notice that the trend was clearly upward and becoming extended. The stock makes a climactic push to new highs, then reverses on increased volume.
Also, notice that the second reversal candle beyond the shooting star. It retraces slightly into the wick of the shooting star. This is a great example of why your stops/risk need not be too close, or wait for entry on the second candle.
For a more granular look at this pattern, check out our post on how to trade using the Shooting Star.
2. Bearish Engulfing Crack
This reversal pattern can be seen in different contexts. It can occur off the open, or in an extended uptrend.
The thesis behind the pattern points to strong supply levels that completely surpass the effort of bulls to push a stock upwards. The result: the price opens above the preceding candle, then commences to sell off forcefully.
The body of the candle completely “engulfs” the prior candle, and should close below it.
Entry
There can be a few discretionary entries on this pattern depending on experience. Aggressive traders may choose to enter as the candle is forming, if supply is clearly visible. This is more of an anticipatory entry.
If trading “by the book”, you may want to wait until the new low is confirmed, then enter on the next candle.
Ideally, you want to trade in either the direction of the larger trend, or enter as an overextended trend reversal.
Set your stop in the body of the candle or at the high of the candle depending on its range.
Bearish Engulfing Examples
FCEL is a perfect example of this bearish candlestick pattern on the 5-min chart. Notice that the stock is trending downward from the pre-market. It is also struggling with VWAP, the red indicator line on the chart below.
Off the open, the stock tries to push higher, but we notice some selling pressure in the upper wick of that first green 5-minute candle. The price then moves lower, engulfing that candle with ease of movement to the downside.
This just happens to be a great example of an Opening Range Breakdown as well.
BA provides us with another look at this bearish candlestick pattern in a different context.
Notice the reversal from an extended intraday run here. Just like the example above, the 5-minute candle completely engulfs the prior candle. This time, it is with increasing volume.
What does that tells us?
Think in terms of effort vs. result. The effort (volume) increased and the result (price) was a complete retracement downward (link to effort/result).
This gives us the confidence to go short, risking toward the highs.
3. Bullish Engulfing Sandwich
Do not be confused by the name. This is also called a “stick sandwich”. It is not a bullish pattern in this particular scenario.
The point here is that the “bullish” engulfing candle in the middle of the pattern is “sandwiched” by bearish candles.
In this instance, it takes more than a single supply candle to overcome the demand. It takes three or four candles for the pattern to confirm.
First, you have what appears to be a bullish engulfing candle (the opposite of the bearish engulfing candle we just identified above). Then, instead of confirming new highs, the stock reverses again.
Context is everything here. In the example below, you’ll see that the general trend is downward. For this reason, the bullish engulfing sandwich can be thought of as a continuation pattern.
Entry
Entry is on confirmation of a breakdown — lower lows on the reversal candle. Stops can be set in the body of the candles above.
Bullish Engulfing Sandwich Example
FUBO provides a fantastic opportunity to see this bearish candlestick pattern in action right at the opening of the market.
Notice that the trend is downward from the premarket. It was also continuing downward from the day before.
The stock stalls at vwap, struggling. It tries to reverse, but notice the volume on the green reversal candle. It is no match for the supply in the first 5-minute candle of the day.
The effort in that first candle dwarfs the efforts of the bulls.
The stock then reclaims vwap, its downward trajectory, and the bulls submit to the bears one more time.
Learn more about this bearish pattern and it’s bullish counterpart in our blog post covering the Stick Sandwich.
4. The Evening Star
We’ve included the Evening Star with the Evening Doji Star because they are very similar, both in style and in context.
Each are bearish candlestick patterns.
Leading into the star, you’ll need to spot a wide bodied candle. The star itself is the narrow body indecision candle that follows the upward wide-body candle.
Entry
The confirmation comes with the breakdown on the longer bodied bearish candle. A great place to enter, risking off the highs of the doji candle.
This pattern works particular well at the high of the day as a trend reversal. But it can also be a trend continuation pattern if it appears at the top of a short-lived rally into prior resistance.
Evening Star Example
In this intraday example with GME, we notice that the upward trend has been strong. For the first hour+ of the morning, there have been few, if any pullbacks.
However, we notice some selling pressure coming on this 5-minute chart just before 10:30am. Typically we might have played that as a shooting star, but we never got the breakdown confirmation with a close below the body of that candle.
Despite the failed breakdown on the shooting star, it is a warning sign that supply is coming into the market.
The alert trader keeping his/her eyes open for any signs of reversal on this overextended stock would notice the Evening Star forming on increasing volume. Again, the effort (volume) is there, but the result (price) is a small doji candle.
How can we interpret this?
It is likely that there is plenty of profit taking going into this GME Evening Star candle as FOMO (fear of missing out) retail buyers chase the stock higher. Strong hands are taking the opportunity to sell their shares.
This gives the attentive trader an opportunity to capitalize by going short.
5. Tweezer Top
The tweezer top is yet another reversal pattern or continuation pattern.
The 1st element is the wide body bullish candle signaling potential exhaustion in an uptrend. This is followed by weak or no effort to continue higher, hence the reversal.
Ideally, volume is increasing during both of these candles as supply is added to the market as weak hands are tempted to continue buying here.
As a bearish pattern, the two candles should share roughtly the same high if possible.
Entry
Entry can be made on a close below the reversal candle with a stop set at the high.
Tweezer Top Example
Take a look at this AMC tweezer top. Can you see the green and red candles providing the proper representation of the two sides of a pair of tweezers?
Depending on the range of the candles, you can enter aggressively as the tweezer is forming, especially if supply appears heavy.
Otherwise, you can wait until the candle closes for your entry and set a stop at the high of day, or in the body of the tweezer top. This is discretionary depending on the risk/reward you are looking for, as well as your risk personality and position size.
As you can see from the chart, often times vwap can be a great target area (red line).
6. Dark Cloud Cover
Dark Cloud Cover is the opposite of a bullish reversal pattern called Piercing Line. For the bearish pattern, it must first have a solid green or white bar continuing the uptrend.
After the bullish candle closes, we expect to see another candle try to make new highs. This new candle fails, then closes more than midway into the body of the 1st candle. Hence, the overhead supply is called “dark cloud cover.”
One of the best ways to play this pattern is in an overall downtrend during a short term reversal. As the stock tries to rally into resistance, you can anticipate the end of the rally.
Entry
Positions should be entered as the stock breaks the prior bar with stops set at the high of the candle.
Dark Cloud Cover Example
Occasionally the market gifts us with a nice double top failure in an overall downtrend. RIOT gave us this opportunity intraday recently as it pulled back from the morning lows, only to find resistance at vwap.
As you can see, RIOT was struggling to overcome vwap on heavy volume the first try. The second try gave us a beautiful confirmation with the Dark Cloud Cover pattern.
7. Shrinking Candles
Shrinking candles are a classic example of effort vs result. It is a bearish reversal candlestick pattern usually accompanied by a huge volume signature below.
The understanding is that the amount of effort to push the stock to new highs is increasing. However, the result is decreasing.
How do we interpret this?
Given the context, it should imply that a considerable amount of selling pressure is adding to the volume as price moves sluggishly upward. This selling pressure is counteracting the demand.
Why else would the candles be shrinking?
Once bulls realize this, it is often too late. Without proper buying underneath, the result can be devastating for long chasers wrongly assuming there is upward momentum.
In essence, there is no synchronicity between volume and price. They are at odds with each other on the way up. An anomaly, if you will.
Shrinking Candles Example
Here is real example from the 5-minute chart of BTBT. As you study this chart, pay close attention to the volume and how it corresponds with each candle.
As you can see, the largest amount of volume comes as BTBT tries to rally above the pre-market highs. As it does, the candles begin to shrink.
Momentum is being lost as gravity, supply in this case, strangles this rocket off the morning lows. Strong hands take advantage of morning break out buyers, who are left holding the bags as the stock fades the rest of the day.
Entry
As you look at the chart, hopefully you can pinpoint a great short entry as the last green candle is broken to the downside. The double top is clear, and a close risk/stop can be set at the highs.
8. Hanging Man
Hanging Man is very similar visually to the Hammer pattern. The Hammer is usually bullish at the end of a down trend. However, the Hanging Man is a bearish candlestick pattern at the end of an uptrend.
Selling pressure is the key to recognizing this pattern.
Inside the formation of the candle, there is considerable selling pressure to begin with.
The close at the highs can be misleading in that the selling pressure is mostly overcome as it rallies.
Often times this results in an opportunity to trap longs who may believe the supply was overcome by demand.
However, the supply is still present.
If longs who bought on the way back up are overcome on the next candle, they are likely trapped from their entries and will add to the selling pressure as the stock capitulates.
Hanging Man Example
Check this beautiful uptrend on the recent intraday chart of PLUG. It appears there is nothing to stop the upward momentum. That is, until we get the Hanging Man, signaling the top for us.
Entry
Ideally the next candle after the close of the Hanging Man would provide the nearest risk/reward entry at the top.
If you aren’t fast enough to enter on the close of the Hanging Man and risk to the highs, it does offer a right shoulder for entry later.
How To Practice Candlestick Patterns
So there we have 8 of the most common bearish candlestick patterns. Now you’re probably wondering how to spot them in real time.
We do have a handful of quick reference guides. These can be a great resource in the moment if you are unsure.
However, learning the context of these patterns is paramount. Otherwise, you may find yourself trading them without proper confirmation. It takes time and experience.
How do you speed up the learning curve?
There is no better way to rapidly increase your exposure to these patterns than in a simulator.
Imagine being able to replay the market for any particular day up to three years in the past. You can do it in your spare time.
Pick a day, pick a pattern, pull up the scanner, and take notes every time you see the pattern play out well.
As you practice, ask yourself these questions:
- Where did the pattern occur in a trend?
- Did the pattern confirm?
- How was volume associated with the confirmation of the pattern?
- Would the risk/reward have been worth it for the trade?
Conclusion
We hope you’ll find this lesson a beneficial tool in your short-trading-strategy belt. Nothing beats the ability to read charts well and bearish candlestick patterns are an integral part to that process.
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