What is Dark Cloud Cover?
Dark cloud cover is a significant candlestick pattern in trading that often indicates a reversal in the market trend. Typically found in an uptrend, this bearish reversal pattern consists of two candlesticks — the first being a large bullish candle followed by a smaller bearish candle that opens above the high of the previous candle but closes below its midpoint. Recognizing this pattern can enhance your trading strategies.
Features of Dark Cloud Cover
Here are some key features of the dark cloud cover pattern that every trader should know:
- Found at the top of an upward trend
- Consists of two candlesticks (first bullish, then bearish)
- The second candle opens higher than the preceding one but closes below its midpoint
- A strong bearish candle following this pattern signals further price declines
- Volume should ideally be higher on the bearish candle to confirm the pattern
Trading with Dark Cloud Cover
Trading with dark cloud cover can be quite effective once you grasp this pattern’s implications. When you identify a dark cloud cover candle, consider the following tips:
- Wait for confirmation: After the formation of the pattern, wait for additional bearish signals to strengthen your confidence.
- Set stop-loss orders: Protect your capital by setting stop-loss orders above the high of the dark cloud cover candle.
- Determine profit targets: Utilize prior support levels to set realistic profit-taking points in line with your trading strategy.