Is Bearish Engulfing Pattern as good as the Bullish Engulfing Pattern?
We have already tested the bullish engulfing pattern 100 times to see if it is actually
worth trading or not, in this video we are going to test the Bearish Engulfing Candlestick
Pattern to see if it is profitable as well.
In the previous video, we found that the probability of price making an upward move after the bullish
engulfing pattern is approximately 54 percent.
Since bearish engulfing pattern is just opposite of the bullish engulfing pattern, in this
video we should expect to get a win rate that is close to the win rate of the bullish engulfing
pattern.
If you have never heard about the engulfing patterns, you should check out the previous
videos on the Trading Rush channel to learn more.
In that video, some people were confused about why I didn't mention the risk to reward ratio
and the profit like I do in the other backtesting videos.
I didn't mention those things because unlike other trading strategies, an engulfing candlestick
pattern is not a complete trading strategy.
Candlestick pattern only tries to predict the short term price direction.
It is said that the next few candles after an engulfing pattern go in one direction.
For example, it is said that after the bullish engulfing pattern, the next day candle has
a higher probability of going up.
And after testing the bullish engulfing pattern 100 times, we confirmed that it does go in
the upward direction, and we can make use of that candlestick pattern in trading, to
find possible entry and exit points.
Similarly, in this video, we are going to find out if the price actually goes in the
downward direction after an engulfing pattern is formed, because we don't want to trade
on a candlestick pattern that doesn't even work.
So, after backtesting the bearish engulfing pattern, here's what happened.
Number 1.
I tested the bearish engulfing pattern on the Euro JPY pair and on the daily timeframe,
because candle stick patterns have more importance on daily and higher timeframes.
Since we used the 200 period moving average to find the trend direction, when moving average
was not flat, in other words when the price was in a strong trend, the bearish engulfing
pattern was working.
The price was actually going in the downward direction most of the time.
But because a bearish engulfing pattern can be formed anywhere in a down trend, sometimes,
the pattern was formed at the end of the down trend.
When the pattern was formed near the pullback of the downtrend, the bearish engulfing pattern
was most effective and could have given higher reward to risk trades.
That makes sense because the bearish engulfing pattern is a reversal candlestick pattern,
and it is mostly used to find the reversal of an uptrend.
During the backtest, we took trades in the direction of the long term trend.
Since the bearish engulfing pattern gave good profit opportunities when the pattern was
formed near or just after a pullback, it is a good idea to take trades when the pattern
is formed near the pullback of a major downward move.
Number 2.
Just like the bullish engulfing pattern, the bearish engulfing pattern did not perform
good when the price action was choppy.
So it is a good idea to ignore the signals given by the bearish engulfing pattern when
the price action is choppy.
Remember, choppy price action and sideways market are not always the same thing.
Price can be choppy in the trending market, just like it is in the sideways market.
If you are looking for bearish candlestick patterns in a long term downtrend, it is a
good idea to make sure you only trade them during the clean downward long term move,
or a less choppy short term upward trend, otherwise you will get a lot of false signals.
So the win rate I got after taking 100 trades with the bearish engulfing pattern, was approximately
56 percent.
What this means is, that the price does go in the downward direction after the bearish
engulfing pattern occurs.
Furthermore, since this is an approximate win rate, and since the bullish engulfing
pattern had an approximate win rate of 54 percent, we can say the win rate of the engulfing
candlestick patterns, is approximately 55 percent.
In other words, the engulfing pattern works around 55 percent of the time and can be used
in a trading strategy to enter and exit trades.
But remember, the win rate of the engulfing pattern you will get when combined with other
strategy, will depend on that strategy.
For example, if your strategy has a good win rate in the first place, adding the candlestick
pattern to the spot potential entry and exit points can be very useful.
In my V WAP videos, you saw me enter trades with the candlestick patterns near the V WAP
line.
There, V WAP and the candlestick patterns were both playing an important role to spot
the potential reversal points.
But overall, engulfing patterns are a profitable candlestick patterns!
That's all.
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