Candlesticks Charts & Patterns
Dark Cloud Cover Candlestick Pattern
The next candlestick pattern that we will learn is a Dark Cloud Cover. It is an extremely important pattern for traders because it shows a possible signal of reversal to the downside. So, let us learn everything about this pattern in greater detail.
What is a Dark Cloud Cover Candlestick Pattern?
The Dark Cloud Cover pattern includes a large bearish candle (black/red) candle forming a “dark cloud” over the previous day’s candle. The buyers push the price higher at the open, but then the sellers take over later in the session and push the prices down. This shift from buying to selling signals that a price reversal to the downside could be forthcoming. A trader should consider the Dark Cloud Cover pattern useful only when it occurs at the end of an uptrend. As the prices rise, the pattern becomes more important for the reversal to the downside. If the price action is choppy then the pattern is less significant as the price remains choppy after this pattern.
What is the psychology behind the pattern?
As the current trend is up, the prices keep making higher highs. On the first day of this pattern formation, as per the expectations, the prices move higher, forming a good bullish candle. On the next day, the price opens above the prior day’s closing price. This also signifies that bulls are still in action and prices are trading up. But there is sudden selling interest from the bears which moves the prices down.
However, the bears keep selling, and at day’s end, the price closes below the opening price. This indicates that the bears are back in the market. The real body of candle 2, should cover the real body of the 1st candle at least by 50 %.
The confirmation of the reversal signal is given by the bearish candle on the next session after the formation of this pattern. The third candle should be a bearish candle. On the break of 1st candles low, a short trade can be initiated. Stop-loss can be placed at the high of the Day 2 candlestick. However as mentioned earlier, a trader must keep in mind other technical parameters to initiate the trade. Confluence of indicators makes the best trades.