Understanding Dark Cloud Cover Candlestick Patterns

Dark Cloud Cover Candlestick Patterns: There are different types of candlestick patterns for analyzing the price movements of securities. Here I will discuss the Dark Cloud Cover candlestick pattern, which is a type of multiple candlestick pattern. We will also look at the formation of this pattern, trading strategy, and entry and exit points.

What is a dark cloud cover candlestick pattern?

Dark cloud cover candlestick pattern is a type of bearish reversal candlestick pattern used by traders to analyze the price movements of securities. A previous uptrend followed by a dark cloud cover pattern indicates a trend reversal to the downside.

The dark cloud cover pattern is a technical analysis tool that consists of two candles, a large bullish candle and a large bearish candle. A pattern formed at the end of an uptrend means that the uptrend will soon end and a reversal will be recorded in the downtrend. Traders use this pattern to exit a long position or enter a short position in a security. The opposite of the Dark Cloud Cover candlestick pattern is the Piercing Line candlestick pattern.

Formation of a dark cloud cover candlestick pattern

The dark cloud cover is formed by the combination of two candles that previously showed a strong upward trend.

The two candles are as follows:

• Green candle (first candle)
• Red candle (second candle)
• Green candle (first candle):- The first green candle in the formed pattern is a large bullish candle that is part of an existing uptrend.

• Red candle (second candle):- The second red candle in the formed pattern is a large bearish candle with an open gap above the closing price of the previous green candle. The closing price of this candle should be less than 50% of the body of the previous green candle.

A common belief in the market is that after the first green candle, the bulls take control of the market. The sudden selling pressure caused by the opening of the second candle’s gap-up covers half the body of the previous candle, pulling the price lower. This indicates that the bears are back in the market with strong selling pressure to drive prices even lower.

How to trade the Dark Cloud Cover candlestick pattern?

Once a dark cloud pattern forms, traders can better identify security trends and find entry/exit opportunities.

entry:- When a dark cloud pattern is formed, an entry point for short positions can be found.

Entry after the pattern is confirmed is always preferred, and entry can be set at the closing price of the next candle of the dark cloud pattern formed.

Stop Loss:- The stop loss for short-term trades is higher than the closing price of the first green candle and can lag behind if the market starts to move in your favor.

Profit Target:- For short positions entered into a dark cloud pattern, you can set targets based on risk-to-reward ratio. Additionally, profit targets can be set at the next support level after entering a position.

Axis Bank chart showing the formation of the Dark Cloud Cover candlestick pattern along with entry and stop loss levels.

caution

• The previous trend must be an upward trend.
• The first candle should be a large green candle.
• The second candle should be a large red candle with an open gap up.
• The two candles formed should be adjacent to each other.
• The second candle in the pattern must cover at least half of the first candle that validates the pattern.

optimal time zone

• In dark cloud cover candlestick patterns, intraday traders are advised to follow a 5- or 15-minute time frame to better see the security’s entry and exit points.
• For swing and position traders, hourly or daily charts are preferred for high success rate trades with many dark clouds.

Limits of the dark cloud cover candlestick pattern

• A pattern formation is only valid in a previous uptrend, so once the pattern is formed in a previous downtrend, the formation is complete.
• All conditions of the pattern formation must be followed for valid entry and stop loss levels.
• Patterns should be combined with other technical tools to help security better see signs of entry or exit.

Finishing

From the above learning, it is clear that dark cloud cover candlestick patterns are an important technical tool to consider in analyzing securities to build better strategies and identify valuable entry and loss levels.

Traders are always advised to use dark cloud cover candlestick patterns in conjunction with other technical analysis tools such as indicators or chart patterns to limit false signals generated. Finding the right entry point with good risk management helps traders achieve long-term profitability.

Written by Deepak M

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