Dark Cloud Cover Overview, How It Works, Example

Identification of a dark cloud cover can be easily carried out by looking for a bullish candlestick that appears before a bearish candlestick, which in turn forms a “dark cloud” over the prior candle. In this example, the Dark Cloud Cover occurs when the third bullish candle is followed by a bearish candle that opens higher and closes below the midpoint of the last bullish candle. The pattern successfully predicted a downturn in the following session where the price moved nearly seven percent lower. Traders utilize other methods or candlestick patterns for determining when to exit a short trade based on Dark Cloud Cover. The Dark Cloud Cover pattern is further characterized by white and black candlesticks that have long real bodies and relatively short or non-existent shadows. These attributes suggest that the move lower was both highly decisive and significant in terms of price movement.

Its lower shadow and small section of the body is usually below the lower shadow of the first bearish candlestick. This is largely because the bearish candle of the cloud has a higher close compared to that of the bearish engulfing candle. One can confuse the dark cloud cover with the Bearish engulfing candle. In addition, the price gaps up on Day 2 only to fill the gap and close significantly into the gains made by Day 1’s bullish candlestick.

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This course is designed to provide the skills necessary for effectively utilizing candlestick charts in trading and investment strategies. The dark cloud cover refers to a candlestick pattern in technical analysis that is a bearish reversal signal. It is observed when a “down” candle opens above the close of the previous “up” candle and proceeds to close below the midpoint of the “up” candle within a candlestick chart. The Dark Cloud Cover candlestick pattern is a bearish reversal candlestick pattern that develops at the top of uptrends. A Dark Cloud Cover candlestick pattern indicates that dark times are most likely ahead for the stock’s share price, hence the name of the candlestick.

Gap Candlestick Patterns: A Trader’s Guide

The dark cloud cover is not a relatively popular candlestick pattern. Indeed, in our experience, you will not experience it in most of your trading sessions. Still, when it happens, it is usually a good sign that a financial asset will reverse soon. Meaning that the bearish engulfing pattern’s second candle will close below the first candle totally.

• Price moves in a brisk upward trend, forming a tall white candle.
• In most cases, this happens when an asset price opens up and then retreats.
• The difference is that the other candlestick patterns are triple candlestick patterns.
• The exchange rate for the currency pair gaps higher on the opening of the second day only to attract more selling interest.

The deeper the penetration of the second candlestick into the real body of the first candlestick, the more significant the reversal pattern becomes. It also becomes more significant if the two candlesticks that form the pattern are Marubozu candlesticks with no upper or lower shadows. The dark cloud cover is a candlestick pattern in technical analysis that indicates the end of an uptrend. In simple words, it is a bearish reversal pattern that signals a shift towards a downside.

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For example, in the chart below, we see that the Apple stock has been in a bullish trend. After a while, the stock formed a dark cloud cover and started moving in a bearish trend. Along the way, it moved below the 25-day and 50-day moving https://forexhero.info/what-is-equiti/ averages while the MACD continued to drop. Similar to the price action trading strategies that we have discussed in previous articles, the dark cloud cover is a useful trading tool that assists traders in analyzing the market.

If you want a few bones from my Encyclopedia of candlestick charts book, here are three to chew on. Previously, we have discussed several price action strategies including cup and handle, bullish and bearish pennants, shooting star, hammer candlestick, triangles, as well as bullish and bearish flags. One of the basic tips to trading successfully is to be familiar with the current market news. Analyzing the acquired information and subsequently making a concrete decision requires effective tools like the price action trading strategies.

Top Continuation Candlestick Patterns

This shift from buying to selling indicates that a price reversal to the downside could be forthcoming. This takeover is a sign that there could be a bearish reversal coming. A dark cloud cover pattern is made stronger if the candle closes below the low of the confirmation candle; from there price can move down. The Tower pattern is a multiple candlestick trend reversal pattern that consists of four or more candlesticks.