The Dark Cloud Cover pattern is a major candlestick pattern indicating a probable trend change – from an uptrend to a downtrend. It forms when a bullish candle is followed by a bearish candle that closes below the midpoint of the prior bullish candle.
This pattern indicates a shift in momentum from the upside to the downside following a price rise. Hence, it is an important pattern that is considered by traders to gauge whether the candle following the bearish candle also shows declining prices. Here we have covered information related to the dark cloud cover candle pattern in detail.
A Dark Cloud Cover candlestick pattern occurs when one big black candle forming a ‘dark cloud’ overlaps the previous day's candle. The price opens higher on buying strength, then drops because sellers take control, forcing it lower. This transition from buying to selling may be an indication of a reversal into a downtrend.
This pattern is considered most useful by traders at the end of an uptrend since it indicates a potential drop in price. However, where the market is highly unstable, this pattern has little reliability, and prices continue changing.
The Dark Cloud Cover pattern has five key conditions:
The Dark Cloud Cover candle pattern appears after a price rise and includes a big bearish candle that covers the previous day's candle. It appears at the top of an uptrend and involves a large green candle, which is a bullish candle. This bullish candle is followed by a red candle that creates a new high before closing lower than the mid-point of the previous green candle.
Here’s how a dark cloud cover chart pattern is formed:
When trading with dark cloud cover pattern, one should keep the following points in mind:
This pattern generally appears after a price rise, indicating a possible change from buying to selling. This pattern is more common in unstable markets and might suggest traders change their approach. In steady markets, it happens less often because strong trends usually last longer before changing direction.
To trade with the dark cloud cover candlestick pattern, follow these three easy steps:
The table below shows the advantages and disadvantages of dark cloud cover candlestick pattern:
|
Dark Cloud Cover Pattern |
|
|
Advantages |
Disadvantages |
|
Early Entry: This pattern helps you spot a possible drop early. Therefore, investors can profit by entering a trade when a drop in price is signalled as a strategic move through short-selling, buying put options, and inverse ETFs. |
False Signals: It might give wrong signals if not backed by other tools, which could lead to losses. |
|
Easy to Spot: It’s easy to recognise and therefore, is great for beginners. |
Not Reliable in Volatile Markets: It may not work well in markets with sudden price changes. |
|
Risk Management: It can warn you to take profits or manage risks if you’re already in a trade. |
Lagging Indicator: It might show a trend reversal only after it starts. So, you might need other indicators for better timing. |
|
Confirmation: It can support other analysis tools, giving you more confidence in your trades. |
|
The Dark Cloud Cover pattern is useful, especially for beginners, because it’s easy to identify, helps with early trades, risk management, and confirms other analyses. However, it can sometimes give false signals, may not work well in unstable markets, and might show trends after they start.