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. Now that we have confirmed these two important elements of this trading strategy, we want to make sure that the Bollinger band condition is also met. More specifically, based on our strategy rules, the second bar within the dark cloud must extend beyond the upper Bollinger line. This provides evidence of an extreme overbought market condition, which will increase the chances of a price move lower.


This shows that the momentum of the uptrend is reducing and the market trend is likely to reverse and move in a downward direction. This shows that the momentum of the downtrend is reducing and the market trend is likely to reverse and move in an upward direction. Although upward momentum is starting to drop, that doesn’t necessarily mean there’s a fundamental change in trend. It can mean that the number of buyers is temporarily dropping while sellers are rising. Those buyers who came in early into the trend are looking to take profits and are now sellers. By comparing two different SMAs, the 'SMA50, SMA200′ option only detects stronger trends.

reversal candlestick pattern

As with the piercing line pattern, some traders will not enter short on the close of the bearish day but will wait a second day to see if sentiment remains bearish. When trading an uptrend we always want to be alert to changes in bullish sentiment even on a small scale. The dark cloud is one such pattern that we can look for as an early sign of a bearish reversal. You may read that the dark cloud cover is good to pick market tops, that is false. Traders would be better served looking for signs of exhaustion of the uptrend and look for this pattern during a rally in price to take another trade short.

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This is in addition to traders with long positions who have placed a hard stop or trailing stop in the market. As these additional sell to close orders get triggered, it will add fuel to the fire pushing prices lower. 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. Traders can use this candlestick pattern to trade the usual trending markets as well as ranging markets.

  • If you use swing trading and larger timeframes like the daily or the 4hr, the potential for making 100 pips or more profit in one trade is there.
  • SMA50 – the indicator compares the current price of the symbol to its Simple Moving Average with the length of 50.
  • The chart examples used for the trade setups that follow were taken from a one-minute timeframe and an exotic currency pair that has a large bid/ask spread.
  • Check out the LizardIndicators Premium Section for more information.

It happens when there is a relatively small bullish candlestick that is completely engulfed by a bigger bearish candlestick. In most cases, the engulfing pattern will often lead to a reversal. The dark cloud cover is a bearish reversal candlestick pattern whose presence indicates a probable reversal to a downward trend. It starts with a bullish candle followed by a bearish candle that yields a new high. It’s important to note that the Dark Cloud Cover pattern is not a guarantee of a trend reversal, but rather a warning sign of potential bearishness. Thus, traders should also consider other factors such as market news and fundamental analysis before making any trades.

How to Trade Dark Cloud Cover?

Technical Analysis The technical analysis definition is a trading tool and method of analysing… If you are looking to trade forex online, you will need an account with a forex broker. If you are looking for some inspiration, please feel free to browse my best forex brokers. IC Markets are my top choice as I find they have tight spreads, low commission fees, quick execution speeds and excellent customer support. Dark Cloud Cover Candlestick Pattern oversold conditionIn the above chart, with the Dark Cloud appearance, the Stochastics is describing an oversold condition. One of the popular approaches for exiting short trade is combining the Dark Cloud Cover with oscillators like the RSI or Stochastics.

But when taken together with other pointers on the, the dark cloud can help us to understand if sentiment is changing to become more negative. In markets that trade 24 hours we relax this condition because the open and close are usually at the same price or very close except for weekends when the market closes. I accept FBS Agreement conditions and Privacy policy and accept all risks inherent with trading operations on the world financial markets. Forex trading is challenging and can present adverse conditions, but it also offers traders access to a large, liquid market with opportunities for gains. This website is independent of of all forex, crypto and binary brokers featured on it.

Technical Analysis

They show current momentum is slowing and the price direction is changing. Traders who were long could consider exiting near the close of the bearish candle or on the following day when the price continued dropping. Traders could also enter short positions at these junctures as well. When identified as a reversal, a Dark Cloud Cover pattern will occur during a minor bullish swing trend. The minimum swing trend deviation requirement is user selectable via the indicator dialogue box.

The pattern is likely named piercing because of the way the white candle’s close… Trading stocks, options, futures and forex involves speculation, and the risk of loss can be substantial. Clients must consider all relevant risk factors, including their own personal financial situation, before trading. Trading foreign exchange on margin carries a high level of risk, as well as its own unique risk factors. The pattern is considered a bearish reversal signal, and the formation of two candle patterns is quite ordinary. The initial candle is bullish with a higher price range than the medium candle.

However, it’s important to note that the Dark Cloud Cover pattern should not be relied upon exclusively in making trading decisions. Traders should combine it with other factors such as other forms of technical analysis, market news, and fundamental analysis to get the best out of it. Also, the low of the 2nd candlestick must not go below the low of the first candlestick. Otherwise, that would turn out to be a bearish engulfing pattern. Here, you will learn what a dark cloud cover forex pattern looks like and how to trade it.

Nifty breaks below long-term average! 23 out of 50 stocks trade under 200-DMA – Economic Times

Nifty breaks below long-term average! 23 out of 50 stocks trade under 200-DMA.

Posted: Mon, 03 Oct 2022 07:00:00 GMT [source]

In theory, the indicates a reversal to a bearish trend, especially if it appears after an overall price rise. A bearish candlestick after the dark cloud cover usually confirms the occurrence of the pattern and trend reversal. The appearance of a dark cloud cover indicates the possibility of a weakness in the uptrend. The pattern comprises a bearish candle that opens above the midpoint of a bullish candle but closes below the level. The market psychology of the bearish piercing line is explained next. The market is moving upwards when a large bullish candle appears making a new high.

These patterns consist of two candlesticks each and mirror each other. The Piercing Pattern forms at the lows of the chart and forecasts a reversal upwards. The Dark Cloud Cover appears at the highs and warns of a decline beginning. Following the same entry procedure as before, a sell order could have been placed a few pips below the red confirmation reversal candlestick , and a stop loss a few pips above the hanging man candle.

level of risk

Avoiding the smaller time frames is key as, like in any candlestick pattern, they are pretty much obvious to any other trader and market will always try to take the top in this case. Identification of a dark cloud cover can be easily carried out by looking for a bullish candlestick that appears before a bearish candlestick, which in turn forms a “dark cloud” over the prior candle. 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. Traders confuse the Dark Cloud with the Bearish Engulfing Pattern. 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.

The higher probability trade occurs when you are able to find an additional layer of confluence that supports taking a short position. We illustrated a few such techniques of incorporating this type of hybrid method using horizontal support resistance or Bollinger bands. Enter a sell order at the break and close of the low of the second candle within the dark cloud cover. This sell order must be triggered within a maximum of three bars following the completion of the dark cloud cover. If the second candle closes below the previous candle’s open, you have a Bearish Engulfing pattern, not a Dark Cloud Cover pattern.

Dark Cloud Cover Candlestick

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  • Most traders are advised to use some additional market timing indicator or technique in conjunction with the dark cloud pattern.
  • Since we are expecting lower price in the future, in case we are using CFDs to trade on currencies, we should trade SELL contracts.
  • The currency market is going through a week of tension and stress with new forecasts for further action by the US Federal Reserve.
  • The higher the body of the white candlestick closes, the stronger this signal to buy is.
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The bigger the upside difference, the more severe the potential reversal is. The more the second candle penetrates the first candle , the higher the chance of reversal. The dark cloud can start to appear in any uptrend – identifying it early is the ideal case so that you can plan a course of action. Update it to the latest version or try another one for a safer, more comfortable and productive trading experience.

Therefore, traders use other technical analysis to exit the short trade. When going short, traders enter the trade at the close of the bearish candle. 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. In the stock or futures markets, the second candlestick must open with a gap above/below the closing price or above/below the high/low of the first candlestick. After the pattern is complete, and the quotations go below the low of the black candlestick, open a selling trade.

To start with, you can use simple patterns to observe the market. These simple means include price bars, trend lines, and breakouts. 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.

Appealing entry levels since the pattern occurs at the onset of the probable downtrend. This is largely because the bearish candle of the cloud has a higher close compared to that of the bearish engulfing candle. One can confuse the dark cloud cover with the Bearish engulfing candle.

We just need the entire candlestick covered although some argue just the real body. In this lesson we learned all about the candlestick reversal pattern known as the dark cloud cover. It is similar in appearance and has the same implications as the bearish engulfing candlestick, however, there are some distinct differences as we’ve noted. Both are extremely powerful trading signals, particularly when they occur after a prolonged period of rising prices.

Longer the Time Period – More Powerful is the Pattern

The opening of the second candlestick occurs in a bullish gap and the closure is below the mid-point of the first candlestick’s body. Some traders believe they may use candlestick formations in isolation, but it is not advised. The dark cloud cover candlestick was created to assist investors in gaining better comprehension of this pattern. It confirms a downward trend that investors may use to help them make investment judgments. The bearish candlestick must be near the midpoint of the preceding bullish candle to signal a trend reversal. In conclusion, both bull and bear candlesticks need to have large figures.


The pattern’s significance is that it signals a shift in momentum from the upside to the downside. A down candle follows an up candle, producing a dark cloud cover. On the following candle, traders note a decline in price as it moves lower.