Dark Cloud Cover Pattern guideline (PDF)
Dark Cloud Cover guide
What is Dark cloud pattern ?
The dark cloud cover pattern consists of two candles that appear at the top of an uptrend and signals a potential bearish reversal from an upward direction towards a downward move. First, it begins with a big candle that holds a large bullish ( white or green ) range. Then, a second bearish ( black or red ) candle follows with a higher gap in the open and a closing below the lower half range of the first candle. To explain, this candle signals that the cryptocurrency has made a new high. Consequently, the Dark Cloud Cover pattern signals a starting possible correction in the price activity for crypto traders, which may use this candle signal as an opportunity to enter new short trades or to close old long positions.
How to interpret dark cloud cover candlestick?
The first bullish candle indicates that buyers seem to hold authority initially, yet sellers steeped into the exchange and forced the price action to retrace most of the bullish progress. Consequently, this two-candlestick structure demonstrates that bulls’ power is exhausted and buyers are losing market control. That is why once the dark cloud cover pattern appears on the candlestick chart, crypto and forex traders expect a developing bearish reversal. Moreover, aggressive traders consider initiating short trades directly on the opening of the candle that follows this dark pattern. Alternatively, traders that already hold long trades exit the market after the occurrence of the dark cloud cover formation.
Components of the dark cloud formation
The dark cloud cover formation is composed of two candles. From one part, the first candle is big and bullish, which indicates a primary extensive amount of buying attraction in the exchange. To clarify, its green body is bigger than the average bullish candle size. From another part, the second candle gaps higher on its opening price. Then falls downer to finally close in the downer half of the body of the previous candlestick ( first candle ). To explain, the bearish body of this red candle retraces minimally by 50% of the first one. Consequently, such components of the formation suggest a potential bearish price activity.
In short, a dark cloud candlestick pattern contains two opposite candles, a big bullish green one followed by a bearish red one. Note that the bullish price activity undertaken by the first white candlestick is almost totally canceled by the second black one, which intimates a bearish reversal opportunity.
How do we identify the dark cloud cover pattern?
We identify the Dark Cloud Cover pattern on forex and crypto charts by looking for the first bullish candle of the pattern during an uptrend. Then we check if the second candle is bearish with an opening that gaps up the previous one. Next, we monitor whether it passed through the center of the first candle or not. Because, in the dark cloud cover pattern, this second candle must not only open beyond the up of the first one. But, also must close at least 50% below the prior candlestick. Another confirmation signal of the dark cloud candlestick arises when another red small-sized candle forms just after the pattern completion on the crypto chart. In short, traders identify the Dark Cloud Cover by looking for the previous criteria.
Dark Cloud Cover Pattern VS Piercing pattern
- What is piercing pattern ?
On the one hand, the opposite version of the dark cloud cover candlestick is called the piercing pattern. On the other hand, this formation should not be confounded with the bearish engulfing design. Because the latter design entirely engulfs the previous candle.
- What is the difference between Dark Cloud Pattern and Piercing Pattern ?
Traders usually confuse the dark cloud cover with the piercing pattern. Yet, the piercing candlestick is exactly the opposite of the dark cloud pattern. In fact, it begins with a large bearish candle and then a bullish candlestick follows, piercing higher. Also, another difference is that the piercing pattern generally occurs following a downside move and highlights a starting bullish one.
Note that the second candle does not entirely surround the first one. To explain, the second candlestick surrounds at least 50% of the first one, but not the entire body. The following Tradingview graph illustrates the piercing line candlestick pattern as a bullish reversal sign that materializes after a bearish trend.
How to trade with dark cloud cover pattern?
Traders can use the dark cloud cover pattern to trade different markets. That is to say, trending markets such as the EURUSD pair. Also, ranging markets. Note that the dark cloud cover pattern should contain both candlesticks with extensive bodies.
Trending market example:
First, traders tend to identify an uptrend. Because the dark cloud candlestick is a bearish reversal pattern. Then, the overall length of the second candle of the patterns gives insights into the potential power of the reverse in the price activity. From one part, the higher the gap up between the red and green candles, the stronger the reverse would be. From another part, the second candlestick of the dark cloud pattern should cover more than the middle point of the prior bearish candle. The following EURUSD chart depicts a dark cloud formation after an upward movement where the relative strength oscillator adds confirmation to the resulted bearish reversal.
Ranging market example:
Considering a ranging market, price tends to rebound between superior and inferior grades. The downer AUDCAD example reveals a consolidation period. In fact, the pair is not clearly trending in any clear direction. Hence, the Dark Cloud Cover candlestick, appearing near the resisting area, delivers a short signal for forex traders.
A dark cloud cover is a two-candlestick pattern that occurs when the second red candle pushes down after opening beyond the close of the previous up candle and then closes downer to the middle range of this prior green candle. The dark cloud cover and the piercing line candlestick are two opposite patterns that assist traders to analyze crypto markets within multiple timeframes. Moreover, the two formations are easy to identify and trade along with some confirming signals preferably, as oscillators.