The Dark Cloud Cover candlestick pattern is a two-candle bearish reversal pattern that occurs at the end of a prolonged uptrend. The first candle is a lengthy bullish candle, showing that the market was in the hands of buyers. The second candle is a lengthy bearish candle that opens above the preceding candle’s high but closes below the previous candle’s middle, signaling that sellers have taken control of the market. Below is a pictorial representation of the candle.
The pattern consists of a lengthy bullish candle followed by a long bearish candle that opens above the previous candle’s high. The green candle is bullish and the red one is bearish in the above image. The second candle, however, closes below the previous candle’s midpoint, indicating a shift in market sentiment from optimistic to negative. This is the most important point that distinguishes dark cover candlestick from just two long bullish and bearish patterns appearing back to back. This pattern is frequently seen as a warning indication that the market is about to reverse from an uptrend to a decline but it sometimes occurs in non-trendy markets too. The applicability of trade signals in such situations is often thin.
The Dark Cloud Cover candlestick pattern is significant because it can provide traders with an early tip to abandon long positions or enter short positions. The pattern indicates that buyers were unable to maintain market power and that sellers have taken over. This pattern can be used as a signal for traders to sell or enter short positions, perhaps capitalizing on a downward trend.
Pattern created?
Traders seek for particular characteristics that distinguish the Dark Cloud Cover candlestick pattern from other patterns when identifying it. The dark cloud cover pattern is made up of two candles, the first of which should be a lengthy bullish candle, suggesting that buyers have won.
The second candle should be a lengthy bearish candle that opens above the preceding candle’s high but closes below the previous candle’s midpoint, indicating that the market has been taken over by sellers. Traders will recognize the Dark Cloud Cover candlestick pattern once these characteristics are identified.
When does the Candlestick Pattern of the Dark Cloud Cover appear?
The Dark Cloud Cover candlestick pattern appears following a market rise. It is a bearish reversal pattern that indicates that market sentiment is shifting from bullish to bearish. Look at the image below.
You can see here that the market is in a bullish trend in the beginning. The market turns bearish as soon as the dark cloud cover pattern appears.
The pattern is produced by two candles, the first of which is a long bullish candle and the second of which is a long bearish candle that starts above the previous candle’s high but closes below its midway. Traders often wait for the Dark Cloud Cover pattern to develop after an extended upswing, as it indicates that buyers are losing momentum and that a trend reversal is possible. The presence of the pattern may indicate a probable shift in market mood, allowing traders to sell or enter short positions.
How to Trade with a Dark Cloud Cover Candlestick Pattern in the Stock Market?
Trading with a dark cloud cover candlestick pattern is a simple three-step process. Below are the steps explained.
The first thing to do is to identify the pattern. You are looking for a long bearish candle after a long bullish one. The image below is a pictorial representation.
The second step is to confirm the trend with a technical indicator. You should use an indicator like RSI for this. You act on the trend when the indicator confirms what the patterns suggested.
Dark cloud cover suggests a bearish market. You trade bearish markets mainly through shorting. Shorting is when you bet on the markets to fall. You may also exit your position (if you already had one) to avoid further loss.
It is ideal to consider the market conditions as well when trading with dark cloud candlesticks. The pattern could produce false signals in a choppy market or highly volatile market.
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