Dark Cloud Cover Candlestick Pattern: There are different types of candlestick patterns to analyse the price movement of securities. Here, we shall discuss a type of multiple candlestick pattern, the Dark Cloud Cover Candlestick pattern . Also, we shall look into its formation, trading strategies and also the entry and exit points in this pattern

What is a Dark Cloud Cover Candlestick Pattern?

The Dark cloud cover candlestick pattern is a type of bearish reversal candlestick pattern used by traders to analyse the price movement of securities.  A prior uptrend followed by a Dark Cloud Cover Pattern indicates a trend reversal towards a downtrend.

The dark cloud cover pattern is a technical analysis tool consisting of 2 candles, a large bullish candle and a large bearish candle. The pattern formed at the end of an uptrend signifies that the uptrend is about to end and a reversal towards a downside is to be registered.  Traders use this pattern to either exit a long position or enter a short position in the security. The inverse of a Dark Cloud Cover candlestick pattern is a Piercing Line candlestick pattern.

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Formation of Dark Cloud Cover Candlestick Pattern

The dark cloud cover is formed by a combination of two candles with a strong prior uptrend.

The two candles are:-

  • Green Candle(First candle)
  • Red Candle(second candle)
  • Green Candle(First Candle):- The first green candle of the pattern formed is a large-bodied bullish candle that is part of existing uptrend. 
  • Red Candle(second candle):- The second Red candle of the pattern formed is a large-bodied bearish candle with a gap up open above the close of the previous green candle. The Close of this candle shoule be below 50% of the body of the previoug green candle
Dark Cloud Cover Candlestick Pattern Formation

The general belief in the market is that at the end of the first green candle is that the bulls are in control of the market. The sudden selling pressure in the gap-up opening of the second candle pulls down the price lower by covering half of the body of a previous candle, indicating bears are back in the market with a strong selling pressure to pull the prices much lower.

How to trade a Dark Cloud Cover candlestick pattern?

Once the dark cloud cover pattern is formed, traders can find entry/exit opportunities with a better view of trends in securities.

Entry:- When the dark cloud cover pattern is formed, an entry to take short position can be spotted. 

Entry is always preferred after the confirmation of the pattern, entry can be set at the closing price of the next candle of the dark cloud cover pattern formed.

Stop loss:- The stop loss for the short trade is above the close of the first green candle and that can trailed as the market starts to move in your favour. 

Profit target:- For the short position entered in a dark cloud cover pattern, a target can be based on the risk-to-reward ratio. Also, the profit targets can be set to the next support levels from the entry of the position.

Dark Cloud Cover candlestick pattern

Chart of Axis Bank showing the formation of Dark Cloud Cover candlestick pattern with entry and stop loss levels.

Points to note

  • The prior trend should be an uptrend.
  • The first candle should be a large-bodied green candle.
  • The second candle should be a large-bodied red candle with a gapup open.
  • The two candles formed should be adjacent to each other.
  • The second candle of the pattern should cover at least half of the first candle body which validates the pattern.

Best time frame

  • In dark cloud cover candlestick patterns, intraday traders are advised to follow 5-minute or 15-minute time frames for a better view of entry and exit points in security.
  • For swing and positional traders, hourly or daily charts are preferred for high-success rate trades with dark cloud cover .

Limitations of dark cloud cover candlestick pattern

  • The pattern formation is valid with a prior uptrend only, so the formation of a pattern with a prior downtrend dosent complete the formation.
  • All the conditions of the pattern formation should be followed for valid entry and stop loss levels.
  • The pattern should be combined with other technical tools for a better view of entry or exit signals in security.

In Closing

From the above learnings, it is clear that the dark cloud cover candlestick pattern is an important technical tool to consider for analysing securities to build better strategies and spot valuable entry and stop loss levels.

Traders are always advised to use dark cloud cover candlestick pattern in conjunction with other technical analysis tools like indicators or chart patterns to limit the false signals generated. Finding a proper entry with good risk management helps traders to be profitable in the long run.

Written By Deepak M

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