Dark cloud cover candlestick pattern is a bearish reversal pattern formed in an uptrend. Like a bearish engulfing candlestick pattern, Dark Cloud Cover is a two candlestick pattern where in the first one is a bullish candle continuing the existing upward trend, and then the second candle opens above the close of the prior up candle and closes below the midpoint of the 1st up candle.
Here are the conditions to be satisfied;
- Uptrend must be in progress.
- The first candle (setup bar) is a bullish bar as a continuation to the uptrend.
- The next candle (signal bar) is a long bearish candle with a gap up opening, giving an impression of a strong market ahead, but sellers come in to close the price at or near the midpoint of the previous bullish candle.
This means, the Dark cloud cover pattern involves a large bullish candle and then followed by a large bearish candle which gaped up forming a “dark cloud” over the preceding up candle. In other words, the 2nd candle opens “sunny” but then “dark cloud” moves in to erase more than half of the previous candle’s gain.
This pattern develops when the second candle closes.
How traders trade Dark Cloud Cover candlestick pattern
Dark Cloud Cover is not as strong as the more definitive bearish engulfing candlestick pattern. However, traders consider it as an important reversal pattern.
Length of the second bearish candle plays an important role in determining the force with which the reversal will take place. To go short, traders wait for the third candle to continue closing lower.
If you are seeing a dark cloud cover pattern in a daily chart, the signal bar indicates that sellers rushed in to end the uptrend by pushing prices down through the day by closing at or near the midpoint of the setup bar or previous bullish candle.
This shift from buying to selling signals a potential price reversal to the downside. If you are long, you might consider this pattern to exit your position or you can exit on the following candle after taking a confirmation when the price continued dropping.
In a choppy market, the Dark cloud cover candlestick pattern has less significance.
Traders view the formation of the Dark Cloud Cover in conjunction with other crucial factors and avoid simply trading based on candlestick patterns. There are many bearish candle formations which signal a trend reversal. Some of the top bearish candlestick pattern include:
- Bearish engulfing candlestick pattern
- Bearish Harami Pattern
- Hammer
- Inverted Hammer
The bullish piercing pattern occurs at the end of the downtrend whereas dark cloud cover occurs at the end of an uptrend.
Traders may use different technical indicators such as RSI, MACD, Stochastic, support and resistance in conjunction with Dark Cloud cover pattern while analyzing market behavior to take a trade.
Here is a list of candlestick patterns for your reference;
- Evening Star
- Morning Star
- Bearish Abandoned baby candlestick pattern
- Bullish Abandoned baby candlestick pattern
- Three Inside up/down
- Three outside up/down
- Inside Bar
- Bullish Piercing
- Spinning Top
- Shooting Star and Inverted Hammer
- Hammer & Hanging Man
- Gravestone, Dragonfly and long-legged Doji
- Engulfing Candlestick Pattern
- Spinning Top
- Marubozu
Be sure you practice identifying and trading these candlestick patterns on a demo account before trading them with real money.
In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.
