Understanding Bearish Reversal Patterns

I’m definitely biased toward bearish reversal patterns. I’ve always been a bit of a countertrend trader, and because many candlestick patterns signal trend reversals, I’ve always found plenty to use in my trading. But trading in anticipation of trend reversals isn’t always a cakewalk. In fact, it almost put me out of the business during the strong bullish markets that have become known as the dot.com bubble. I managed to keep from going broke during that period, and I learned some expensive lessons about money management and using stops that I include in my explanations throughout this chapter.

A bit of a warning about using short reversal patterns: First, remember that in theory, a short has an unlimited loss. Also, keep in mind that when you’re shorting stocks, you’re working against a general long-term uptrend in stock prices. Some successful traders are exclusive shorts, but they’re pretty rare. Don’t get me wrong. I do believe that shorting should be part of any trading or investing program, but please use shorting as part of a larger trading strategy, not as your primary way of working the markets.

You can use many extremely useful patterns for shorting, as signals for exiting from a long, or as exercises in patience before buying. Take a look at this section, which covers those patterns.

The bearish engulfing pattern

The bearish ...

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