These are stocks that we post daily in our Discord for our community members. We can see the dark cloud cover pattern occurring on the Microsoft (MSFT) daily chart on February 11th, 2020. A Dark Cloud Cover Pattern occurs when a bearish candle on Day 2 closes below the middle of Day 1’s candle, as you can see on Chart 1 above. This strategic edge offers traders the confidence to decipher market momentum effectively and make informed entry decisions.

This makes it a valuable tool for independent evaluation when the dark cloud cover occurs. 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.

Dark Cloud Cover Strategy Example Trades

• The dark cloud cover refers to a candlestick pattern in technical analysis that is a bearish reversal signal.
• It starts with a bullish (green) candle followed by a bearish (red) candle that yields a new high.
• Our chat rooms will provide you with an opportunity to learn how to trade stocks, options, and futures.
• Both patterns suggest a bearish reversal, but the Dark Cloud defines an ideal entry-level because of the higher close of the bearish candle against the bullish candle.
• Strike offers a free trial along with a subscription to help traders and investors make better decisions in the stock market.
• To exit the trade we make use of a time exit and get out of the trade after 5 bars.

As such, it is essential to include indicators as well as technical analysis. Dark cloud cover technical analysis helps investors trade during bearish reversal followed by confirmation. First, the investors must identify a dark cover because there can be other phenomena resembling the cover, like bearish engulfing, shooting star, etc. Secondly, the investors can wait till the confirmation to make a selling decision. However, a cover is not always harmful, and the stock prices are likely to recover in a few days or weeks, provided the investor is in for the long run. This gap indicates that the residual buying pressure from the previous day’s close encourages more buyers to buy the stock at the beginning of the day.

How to identify a dark cloud cover

Yet, sudden and decisive selling pressure causes the second candle to erase much of the previous day’s gains and price advances. Third, the dark cloud cover candlestick pattern tends to give out false signals when they appear during parabolic phases. Of course, it is still possible for a dark cloud cover to successfully serve as a bearish reversal pattern during a parabolic phase. However, the odds are not in your favor, especially if volume is lacking. Unlike the dark cloud cover, which is strictly a bearish reversal pattern, the marubozu can be either a bullish or bearish reversal pattern, depending on its color and position on the chart. If a long-bodied bullish candle appears during a downtrend, it is considered a bullish marubozu and, thus, a one-candle bullish reversal pattern.

What are other Types of Candlestick besides Dark Cloud Cover?

The fact that this candle opens higher, but erases more than half of the previous candle’s gain, is what gives it a bearish character and also its name. Strictly Necessary Cookie should be enabled at all times so that we can save your preferences for cookie settings. Our content is packed with the essential knowledge that’s needed to help you to become a successful trader. We have members that come from all walks of life and from all over the world. We love the diversity of people, just like we like diversity in trading styles. Also, we provide you with free options courses that teach you how to implement our trades as well.

After the new high, the market is expected to close lower than the bullish candle’s midway point. 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. However, if you see that the bearish candle forms on a day that’s normally very bullish, you could perhaps be a little more certain when acting on the signal. However, if we see that the candle ranges diminish as the uptrend gets older, we could assume that the market is soon going to turn around. The appearance of the pattern does not ensure that the price will decrease but only shows a probability.

Moving Averages Confluence Strategy

• In the above chart, with the Dark Cloud appearance, the Stochastics is describing an oversold condition.
• By avoiding these common mistakes, traders can improve their performance and increase their chances of success when trading the dark cloud cover strategy.
• The Dark Cloud Cover candlestick pattern is significant because it can provide traders with an early tip to abandon long positions or enter short positions.
• A reversal in the stock market means a change in the direction of an asset’s price.

But later in the day, the sellers start selling off their stocks, thus pushing the price downwards. This gap gives the bearish candle a higher position than the bullish candle. The pattern indicates a potential bearish reversal in the market and can be used to identify trading opportunities.

For traders, understanding this pattern helps them anticipate reversals at the top of uptrends. The Chart Guys provide educational content that dives deeper into interpreting Dark Cloud Covers and using them as part of a broader trading strategy. Therefore, traders use other technical analysis to exit the short trade. The formation of the Dark Cloud Cover takes place when a bearish candle follows a bullish candle. The bearish candle opens above the close of the bullish candle and closes below the middle of the bullish candle.

Here we have covered information related to the dark cloud cover candle pattern in detail. The dark cloud cover is a reversal pattern in which a bearish downtrend follows a bullish uptrend. This causes the stock price, which has been increasing for some time, to decrease suddenly.

We’ve also had a look at some strategy examples that use the dark cloud cover pattern. In our Microsoft example, traders would have gone short the next day when the bearish candlestick moved past the previous day’s low. This pattern would have produced profits for these traditional traders, but on average, trading this pattern bearish would lose you money over time. The dark cloud cover candlestick pattern can be used across all markets, but it is most frequently seen in stocks.

Below are four other main advantages of a dark cloud cover candlestick pattern. The Dark Cloud Cover Candlestick Pattern can be used on your trading platform charts to help filter potential trading signals as part of an overall forex trading strategy. The Dark Cloud is an indicator of a bearish trend and is handy for trend and range trading. The pattern’s reliability depends on whether it is used in isolation or alongside complementary technical analysis tools. When used alone, it becomes less reliable, as technical analysis and, by extension, trading, are multi-faceted. Hence, relying solely on the dark cloud cover gives a limited and restricted perspective.

Next, the possibility is confirmed because, after that, a big red bearish candle appears. These are only a few examples of the plethora of candlestick patterns utilized in technical analysis. Each pattern possesses its own distinct qualities and can provide important insight into market patterns and prospective price moves.

We provide our members with courses of all different trading levels and topics. An dark cloud cover pattern investor could potentially lose all or more of their initial investment. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Testimonials appearing on this website may not be representative of other clients or customers and is not a guarantee of future performance or success. Confidently identify high-probability inflection points with the SuperStack indicator.

Despite the fact that both the Dark Cloud Cover and Bearish Engulfing candlestick patterns are bearish reversal patterns, there are significant variations between them. The Dark Cloud Cover pattern happens when a bullish candle is followed by a bearish candle that starts above the high of the previous candle but closes below its middle. The Bearish Engulfing pattern happens when a small bullish candle is followed by a larger bearish candle that totally engulfs the previous bullish candle. The Bearish Engulfing pattern is regarded as a stronger reversal indicator.

Alternatively, you can place the target level at the recent areas of resistance/support. Start by identifying the pattern in your chosen market, and apply the strategies discussed above. With practice and discipline, you can master trading the Dark Cloud Cover pattern to achieve consistent success. From April 13 to 20, the prices rose to $53.10 before falling to $48.21 on April 29. All the above requirements must be appropriately satisfied for the dark cover formation. Some patterns work better with stronger trends, while others work better with weaker trends.