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#6: What is a Dark Cloud Cover

dark cloud cover pattern

As with any technical analysis tool, it is crucial to consider other factors and confirmations before making a trading decision based on the Dark Cloud Cover pattern. This helps to ensure a comprehensive approach to market analysis and enhances the likelihood of making successful trades. This pattern helps investors and traders to make informed decisions about buying, selling, or holding shares based on the perceived strength or weakness of the market. The Piercing Pattern is a bullish candlestick pattern used by technical analysts to signal a potential trend reversal in the market.

dark cloud cover pattern

Dark Cloud Cover is a significant candlestick pattern that technical analysts and traders use to predict potential bearish reversals in the financial markets. The primary purpose of utilizing this pattern is to identify potential short-term shifts in the market sentiment, providing traders with insights on when to exit or possibly short favorable long positions. This pattern is particularly observed in uptrends and is seen as an early warning sign of an impending decline in an asset’s value. This phenomenon demonstrates that the bears have taken control of the market, overshadowing the previous day’s bullish sentiment. Consequently, traders who utilize this pattern can either close their long positions to mitigate potential losses or initiate short positions to capitalize on the anticipated price decline.

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There are two notable characteristics of this pattern that need to occur for it to be classified as a valid dark cloud cover forex pattern. Firstly, the second red candlestick of the pattern should open at a higher price than the close of the first green candlestick, creating what is called an opening gap in trading terms. The close of the bearish candle may be used to exit long positions.

On the fourth and fifth of April, PayPal stock made a dark cloud cover pattern. It predicted a downtrend correctly, shown in the following chart. As mentioned earlier, the dark cloud cover is a pattern where the down candle opens above the close of the up candle and then closes below the midpoint of the up candle. If the price continues to trend lower by the third candle, then this is known as the confirmation. The confirmation is an additional indicator that suggests that a trend may be occurring.

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The Dark Cloud Cover is a bearish reversal pattern represented by one candle. This candle makes a new high but closes below the middle point of the previous candle, then initiating a potential downward movement. After a Dark Cloud Cover appears in a chart, the price is likely to initiate a new bearish trend or perform a pull-back within the uptrend.

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If other “bear” patterns are observed, a trader may potentially wish to short that security as well. The best setup for the dark cloud cover candlestick is for it to appear when price is trending lower. An upward retrace of that down move
appears followed by dark cloud cover. It signals a reversal and when price breaks out downward, and the stock joins the downward primary trend already in existence.

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In other words, it must open above the upper shadow of the previous candlestick. The close of the second candlestick is also important as it must penetrate well into the real body of the preceding candlestick and must close beyond the mid-point of the previous candlestick. The appearance of a downward price action after the dark cloud cover may be used by trend followers as a signal to exit long positions. Similar to a bullish engulfing pattern the green candle opens below the previous long red candle and covers 50% or more but not 100% of the same candle.

  • As we have discussed earlier the pattern satisfies all the conditions.
  • Consequently, traders who utilize this pattern can either close their long positions to mitigate potential losses or initiate short positions to capitalize on the anticipated price decline.
  • One can confuse the dark cloud cover with the Bearish engulfing candle.
  • A dark cloud cover pattern consists of two candlesticks that form near resistance levels where the second candle covers half or part of the first candle.
  • This would place the entry much closer to the protective stop and would reduce the capital at risk on the trade, though there is no guarantee that a pull-back will occur.

The chart example above shows a dark cloud cover forex pattern (marked by the yellow square) that formed at the end of a bullish phase before a strong reversal lower followed. When this pattern appears on a chart, it typically indicates a shift in momentum from a bullish to a bearish sentiment. Naturally, forex traders need to remember that the position will have inherent risk, since the Bearish Dark Cloud Cover Candlestick chart pattern is only a moderately reliable downside reversal pattern. The Bearish Dark Cloud Cover Candlestick chart pattern is a bearish reversal pattern consisting of a two day candlestick formation. The Bearish Dark Cloud Cover pattern can be used by forex traders skilled in this method of technical analysis to help signal a trend reversal to the downside.

What does this indicate in the market?

Traders would then establish a downside profit target, or continue to trail their stop loss down if the price continues to fall. We have a basic stock trading course, swing trading course, 2 day trading courses, 2 options courses, 2 candlesticks courses, and broker courses to help you get started. When the open and close are at the high and the low, or vice versa, then the candlestick will have no shadow above or below the real body.

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It is like
a swimmer moving with the current turning against the current to avoid a buoy followed by a resumption of him swimming with the current. Similar to some of the candlestick patterns that we discussed in previous articles, traders cannot trade it based solely on its formation. As such, it is essential to include indicators as well as technical analysis. The dark cloud cover is also often confused with the piercing pattern.

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Is a dark cloud cover bullish or bearish?

Dark Cloud Cover is a bearish reversal candlestick pattern where a down candle (typically black or red) opens above the close of the prior up candle (typically white or green), and then closes below the midpoint of the up candle.

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