Dark Cloud Cover Pattern: Making money in money in the stock market is mainly dependent on being on the side of the party who is in control of the market and there are various tools individuals can use to identify the potential trend in the market.
Out of these various ways, the dark cloud cover pattern is one of the ways of identifying the potential trend in the market. In this article, we will help you comprehensively understand dark cloud cover pattern and how to trade with them.
What Is A Dark Cloud Cover Pattern?
A Dark cloud cover is a two-candlestick pattern that appears at the top of an uptrend. This pattern indicates a bearish reversal after an uptrend in the market.
The candlestick is formed when a red candle appears after a green candle at the top of an uptrend indicating a potential downtrend.
What Does A Dark Cloud Cover Pattern Look Like?
As mentioned above, the dark cloud pattern is a two-candlestick pattern that appears on top of an uptrend. The first candle is a large green candle that tells you there is bullish momentum in the market.
The second is a red candle that opens above the green candle and closes within the body of the red candle. This candle should cover at least 50% of the body of the green candle while closing.
This candlestick pattern will work better if the candlesticks are larger in size and have little or no wicks on them.
Note: If the red candlestick closes below the opening price of the green candlestick, it won’t be considered a dark cloud cover pattern but will be considered a bearish engulfing pattern.
Dark Cloud Cover Vs Bearish Engulfing Pattern
Just like the dark cloud cover, the bearish engulfing pattern consists of two candlesticks – a green candle followed by a red candle. But the key difference here is while the red candle in the dark cloud covers only half of the green candle, the red candle in the engulfing pattern completely covers the green candlestick.
Thus, the bearish engulfing pattern shows a greater conviction of the selling pressure than the piercing pattern.
What Does A Dark Cloud Cover Pattern Tell You?
This candlestick pattern tells us that, the markets are initially controlled by the buyers up until the green candle.
In the next trading session, the buyers push the prize further up which causes a gap opening in the market. This gap is the final attempt of the buyers to push the price further, but due to the entry of the sellers, the buyers begin to lose control.
This causes the price to go down which ends up covering the gap and the price closes at least at the midpoint of the previous green candle. This confirms that the bearish forces are taking over the market and indicates a potential bearish reversal.
As the dark cloud cover pattern is a bearish reversal pattern, it is more reliable when it appears on top of a bullish trend. Furthermore, the pattern will be more reliable when the candles formed are large.
Lastly, this pattern has more significance when the red candlestick closes further below the midpoint of the green candlestick.
How To Trade With Dark Cloud Cover Pattern?
To explain how to trade using this pattern, we have taken an example from the daily charts of nifty that will help you understand these patterns better.3+357
In this chart, the first candle C1 represents the part of the uptrend and indicates that the bulls are in control.
The second candle here which is C2 opens a gap-up but then starts moving downwards and closes below the midpoint of C1. This indicates that the bears have taken control over the bull in the market.
The next candle that is the C3 again has closed below the lows of C1 and C3 which indicates the confirmation of the trend reversal
The strength of the reversal will depend on how big the bodies of the C1 and C2 candles are. The larger the size of the bodies, the better the chances for reversal.
Trade entry & Stop loss
Here, individuals can open a short position in the market when the C3 candle starts trading below the low of the C1 candle.
Stop loss: If the markets move above the highs of the C2 candle, it is recommended that individuals exit their short positions from the market.
Profit Target: Since the Dark cloud cover does not have a clear target, it is recommended that individuals keep a trailing stop loss. Thus the individuals can continue to reap the benefit of the downtrend in the market and stop loss will automatically be hit when the market starts moving in the upward direction.
Also Read: 8 Best Books For Intraday Trading – Top Reads For Beginners!
In this article, we discussed what is dark cloud cover pattern, what it looks like, its difference from the bearish engulfing pattern, what it tells you, and the method of trading with it.
Though the dark cloud cover pattern is a pretty good indicator of a trend reversal, its validity will revolve around price action. Like where the key levels of resistance in security are. Thus it is important for individuals to confirm the pattern with the help of indicators like RSI which help you identify the overbought zones.
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