Candlestick patterns are amongst probably the most discussed topics in trading circles…

…but why?

Well, because they’re the important thing to understanding what story the market is attempting to inform you!

Do you want there was a candlestick pattern that would offer insight into market reversals?

Or one that would indicate when bears have gained control over bulls?

If the reply is yes – today is your lucky day!

It’s exactly what the Dark Cloud Cover Candlestick Pattern can show you how to with.

In this text, you’ll:

• Discover what the Dark Cloud Cover Candlestick Pattern is and different styles and sizes it will possibly take. 
• Explore the markets where the Dark Cloud Cover Candlestick Pattern could be found and learn the best way to trade it in various market conditions. 
• Learn diffrerent startegies for actively trading the markets with real-life examples.
• Understand the restrictions of the Dark Cloud Cover Candlestick Pattern and situations where it’s best to avoid trading it

Sound good?

Let’s dive in!

What’s the Dark Cloud Cover Candlestick Pattern?

The dark cloud cover candlestick pattern involves just two candles and acts as the alternative of the piercing pattern.

So, while the primary candle is bullish and might take various styles and sizes…

…it’s the second candle that matters most!

It needs the value to open higher than yesterday’s close after which drop greater than halfway down the previous candle.

While this might sound a bit tricky, examples may help clear things up.

Let’s take a look at a number of to make things easier to grasp…

Dark Cloud Cover Candlestick Pattern Diagram:

In this instance, the value initially rises with bullish momentum, followed by the subsequent candle gapping up.

Nonetheless, inside the same candle, the value must then fall and shut below the 50% level of the previous candle.

To indicate the assorted scenarios where this might occur, take a have a look at this diagram…

Dark Cloud Cover Candlestick Pattern Examples:

The importance of this candlestick pattern lies in how the market reacts to it.

Consider this: the primary candle signals bullish strength, setting a positive tone for the subsequent day.

The bullish momentum is so strong that the value opens higher than the previous close, making a price gap—a transparent indicator of bullish dominance!

Nonetheless, as time progresses, the value progressively falls below the 50% level of the bullish candle and closes…

This shift demonstrates that despite the initial bullish momentum, the bears managed to overpower the bulls, negating yesterday’s gains, even with the added boost from the gap up.

At this point, any bullish investors may begin to query their positions, as momentum swings back in favor of the bears…

…well, I do know I might!

Nonetheless, it’s also price noting that the upper the value gaps up after which returns below the 50% level, the stronger the signal becomes.

Consider it as the value having extra bullish momentum that gets worn out inside the same session, effectively swinging the momentum in favor of the bears!

Distinguishing Between Engulfing and Dark Cloud Cover Patterns

It’s necessary to grasp that if the second candle completely engulfs everything of the preceding bullish candle, it’s not a dark cloud cover pattern but somewhat a bearish engulfing pattern.

Try these examples…

Dark Cloud Cover Vs Bearish Engulfing:

On the left side is an illustration of the Dark Cloud Cover candlestick pattern, while on the best side, you possibly can see the bearish engulfing pattern.

The bearish engulfing pattern represents a stronger bearish signal, but unlike the Dark Cloud Cover pattern, it doesn’t require a gap-up and follows its own algorithm and techniques.

What markets can the dark cloud cover be utilized in?

The dark cloud cover candlestick pattern could be used across all markets, nevertheless it is most regularly seen in stocks.

The rationale is that stocks are likely to exhibit more price gaps from someday to the subsequent – as a result of their each day open and shut.

In contrast, forex markets typically experience gaps only on very low timeframes or over weekends.

Personally, I typically use the Dark Cloud Cover pattern in stocks, because it occurs more regularly on this market – so there’s less searching to do.

Ranging Markets

Often, the Dark cloud cover candlestick pattern is related to trend reversal, and although true, I prefer to view the pattern as an indication of rejection.

It could be applied to all market conditions, including trending and ranging scenarios.

For instance, when the value revisits a spread high, finding a Dark Cloud Cover pattern generally is a priceless indicator of potential price movement.

This implies that, despite bullish momentum, price did not break above the range high.

Provided that the range high area represents an area of value and the Dark Cloud Cover pattern emerges, it’s reasonable to assume that price might experience a temporary retracement, presenting a favourable trading opportunity…

…and that’s what we’re searching for, right?

Trending markets

In trending markets, the dark cloud cover pattern offers various trading opportunities.

Essentially the most obvious could be its role as a reversal pattern at extreme highs.

This often happens when price encounters a major resistance level on a high timeframe, following a protracted uptrend.

Just like the ranging example, if price demonstrates rejection at a serious resistance level, it’s reasonable to assume some selling pressure goes to return with it.

One other scenario in trending markets happens when price is already in a major downtrend and experiences a temporary pullback.

Utilizing the dark cloud cover pattern here can show you how to time your entry to capture a trade opportunity that might need been missed earlier.

As well as, the dark cloud cover pattern may even be applied in counter-trend trades.

While this approach does take practice, it will possibly still be useful for locating minor reversals inside trends, helping you time your exits or start short positions in certain assets.

Guide on the best way to trade the pattern

Alright then! So how do you truly trade this pattern?

Well, there are a number of necessary things to take into consideration before you start.

Firstly, you will need to at all times trade the dark cloud cover pattern within the context of the general market.

You shouldn’t blindly take every dark cloud cover pattern and not using a strong understanding of what the market is doing and its overall position in the larger picture, that’s obviously!

As an alternative, you need to ask yourself:

• Is price approaching a resistance level?
• Is it trending and reaching a serious area of value?
• Is there a pullback in a downtrend?

All of those questions needs to be thought of when deciding the best way to use the dark cloud cover pattern in your trading strategy.

Understanding the market context helps you make more informed decisions and increases the prospect you’ll make a successful trade.

Using other Technicals

As at all times, the dark cloud cover candlestick pattern mustn’t be utilized in isolation; it should be combined with other triggers and technical evaluation tools.

This might include a moving average crossover or identifying a key resistance level.

As an illustration, you would possibly observe a dark cloud cover pattern at a Fibonacci retracement level.

No matter the particular technical indicator or trigger you utilize, it’s vital to not rely solely on the pattern in isolation!

By utilizing it with other technical evaluation tools, you gain a a lot better overview of what the market is doing, making your trading decisions more practical.

Confirmation

One other crucial concept to contemplate is waiting for extra confirmation.

Now, this might be as straightforward as observing the subsequent candle after the pattern forms…

Confirmation Candlestick Example:

For instance, if the next candle exhibits bearish follow-through, the value will likely proceed to say no further.

While waiting for confirmation may mean missing out on entering the trade immediately after the pattern occurs, it will possibly provide extra peace of mind – increasing confidence in your trading decisions.

This method helps make sure that you enter trades with greater conviction and reduces the chance of entering prematurely.

Volume Confirmation

Finally, adding some volume confirmation brings one other dimension to trading the dark cloud cover pattern.

Increased volume on each the bullish and bearish candlesticks on this pattern strengthens the likelihood of a successful reversal.

Higher volume means heightened activity, indicating that bulls and bears are fighting for control in that area of the market!

While not a requirement for trading the pattern, the heightened volume provides extra confirmation of the reversal signal.

It adds one other layer of confidence and strengthens the validity of the trading setup.

Alright, now that the best way to discover the pattern, let’s delve into some real examples to show you how to successfully trade it available in the market!

Trading Strategy For Ranges

Every day PayPal Holdings Chart Range:

On this Every day PayPal Holdings chart, PayPal exhibits a spread after a substantial uptrend.

Price has established a distinctly higher level before retracing to the identical level multiple times.

As the value returns to this range high, it suggests that this area of value could potentially act as a resistance level.

Let’s take a better look…

Every day PayPal Holdings Chart Resistance Test:

On the resistance level, the value forms an inverted Hammer, indicating some rejection. Nonetheless, the value subsequently returns to the zone again.

At this point, it’s difficult to find out whether the bulls or bears have control!

Subsequently, it’s best to attend a bit longer to see if the market provides additional information…

Every day PayPal Holdings Chart Dark Cloud Cover Formation:

So the subsequent day, the value gapped up but closed across the 50% level of the previous candle.

This happened at resistance, which has witnessed a few rejections already…

So…. what am I waiting for, right?

“…Let’s pull the trigger, Rayner!”

“…Take the trade!”

In fact, it may appear very tempting to leap right in…

…Nonetheless, it’s crucial to recollect the importance of confirmation!

Price has swiftly returned to this level, and it could be a great idea to attend for extra confirmation showing that this level will remain a robust resistance level.

Let’s take a better have a look at what unfolds next…

Every day PayPal Holdings Chart Dark Cloud Cover Confirmation:

OK, with the strong bearish confirmation candle now in place, there’s more confidence that this resistance level will likely hold, right?

Now could be the time to enter the trade and goal the range low for our take profit!…

Every day PayPal Holdings Take Profit:

…and Congratulations!

You only successfully traded the Dark Cloud Cover in a spread!

Nonetheless, let’s face it, markets don’t at all times range like this, do they?

So let’s discuss how you would possibly use this in a trend trading situation!

Trend Trading Example

Every day CleanSpark Downtrend Chart:

On the each day timeframe, CleanSpark Inc. is clearly in a robust downtrend.

The trendline serves as a guide to where price might encounter resistance in the long run.

Let’s take a have a look at what unfolds next!…

Every day CleanSpark Dark Cloud Cover Formation:

Once more, price has gapped up but did not sustain higher levels, closing below the 50% mark of the previous candle.

Just like the previous instance, let’s exercise patience and wait for further confirmation…

Every day CleanSpark Dark Cloud Cover Confirmation:

While price didn’t confirm the reversal immediately and as a substitute retested the trendline, it did eventually fall below the pattern.

Now at this point, you’ve got multiple aspects in your favor:

• Price is rejecting the strong each day trendline
• Price has formed the Dark Cloud Cover Rejection pattern at this level. 
• Price has begun to fall away from the trendline. 
• Downtrend momentum is in your side!

So let’s get to it and take this trade!…

Every day CleanSpark Dark Cloud Cover Entry:

For the stop loss, placing it just above the trend line allows room in case price continues to check the trendline.

That way, if price breaks above the trendline, the trade isn’t any longer valid, and exiting could be prudent.

As for take profits, I feel taking them on the previous low seems logical.

Make sense?

Good!

Let’s see what happens next…

Every day CleanSpark Dark Cloud Cover Entry:

Wow! Congratulations on one other successful trade!

You may see how this approach could be an efficient method for leveraging the downtrend momentum of upper timeframes to capture profits in shorting scenarios.

OK – let’s explore one last example…

Every day JP Morgan Chase & Co. Chart:

Once more, the Dark Cloud Cover formation is observed.

As usual, it’s advisable to attend for one extra candle of confirmation before considering this trade…

Every day JP Morgan Chase & Co. Entry:

With the confirmation now in place, it’s time to take the trade.

The goal stays the previous lows, as seen in our other examples, and the stop loss needs to be set just above the pattern…

Every day JP Morgan Chase & Co. Trade Management:

But do you notice something interesting occurring here?

Price isn’t behaving as expected following the Dark Cloud Cover pattern…

With bearish momentum struggling to take care of control, this will likely be cause for concern.

Still, to follow things through, let’s persist with the trade and see what develops…

Every day JP Morgan Chase & Co. Trade Stop Out:

Oh no!

You bought stopped out!

But it surely’s not all bad news, as there’s a priceless lesson to be learned here.

You would possibly have already realized, but let’s analyse whether this was truly a great trade to take…

Every day JP Morgan Chase & Co. Trade Evaluation:

After some reflection, there have been several small print which needed to be checked out more rigorously before entering the trade…

Firstly, throughout this text, you’ve learned that you could’t simply trade the Dark Cloud Cover Pattern every time it appears in your chart.

You would like other technical indicators to help you in making that trade.

Nonetheless, there are much more apparent the explanation why this trade didn’t work out.

For one, the strong resistance level was recently broken, and the pattern didn’t occur on the resistance level…

…it occurred well after bullish momentum had pushed through it.

This implies that the bulls have considerable control, as shown by their ability to interrupt the resistance level with significant follow-through.

Moreover, if you analyze the larger picture of the market, it seems safer to categorise this chart as being in an uptrend somewhat than a downtrend.

In other words, more aspects were working against the trade than for it.

It’s necessary to have a look at the larger picture.

On this case, the Dark Cloud Cover pattern alone couldn’t outweigh the momentum of other key aspects available in the market.

All the time keep this in mind when spotting the Dark Cloud Cover pattern and deciding whether or to not execute the trade!

Limitations

Cannot Be Used In Isolation

As mentioned previously, the dark cloud cover candlestick pattern can’t be utilized in isolation.

Trading this formation each time it occurs on the chart would yield little or no success.

When used along with other indicators and technical evaluation, it becomes far more reliable!

Pattern Location

Where the pattern occurs is essential.

Context of the general market and its behavior is crucial when considering whether or to not take a trade.

Strong Understanding Of Technical Evaluation

The Dark Cloud Cover Pattern requires a deeper understanding of indicators that may assist it.

Because it is a pattern that requires context and other technicals, one limitation is that you just need some knowledge of other indicators and technical tools to effectively trade it.

Rarely occurs in certain markets

As stated within the article, gaps are essential to this pattern, making it a rare occurrence in assets like forex.

Nonetheless, on assets like stocks, where gaps are common, these patterns can occur quite regularly on the each day timeframe.

Conclusion

So, in conclusion, the Dark Cloud Cover Pattern emerges as a useful tool in stock evaluation.

This pattern serves as a sturdy entry trigger, shedding light on the continuing struggle between bulls and bears at key areas on the chart.

By combining the Dark Cloud Cover Candlestick pattern with other technical analyses, traders can accurately discover entries and increase their odds across various market conditions.

This strategic edge offers traders the arrogance to decipher market momentum effectively and make informed entry decisions.

To summarize, in this text, you’ve:

• Gained actionable knowlegde in regards to the Dark Cloud Cover Pattern and what it will possibly appear to be in numerous scenarios. 
• Explored the assorted market conditions through which the Dark Cloud Pattern could be applied and the way it could appear. 
• Learned latest strategies for trading the Dark Cloud Cover with real-life examples. 
• Understood the restrictions related to using candlestick patterns alone and the way necessary contextual evaluation is inside the overall market

Finally – congratulations!

With this latest addition to your candlestick pattern arsenal, I encourage you to search out some real-life examples in your charts, grabbing some additional layers of technical evaluation to refine your strategies.

I’m wanting to hear your thoughts on the Dark Cloud Cover Pattern, too!

Have you ever used it before, or do you lean towards other reversal patterns for entries?

Which candlestick patterns do you are likely to favour?

Be happy to share your insights within the comments below!