Dark Cloud Cover is a bearish reversal candlestick pattern in which a down candle (typically black or red) opens above the close of the previous up candle (typically white or green), then closes below the up candle’s midpoint.
The pattern is significant because it indicates a change in momentum from the upside to the downside. An up candle is followed by a down candle to form the pattern. Traders expect the price to fall further on the next (third) candle. This is known as confirmation. Click here to know more about the advantages of gst.
Recognizing Dark Cloud Cover
A large black candle forms a “dark cloud” over the preceding candle in the Dark Cloud Cover pattern. As with a bearish engulfing pattern, buyers drive the price higher at the start of the session, but sellers take over later in the session and drive the price sharply lower. This shift from buying to selling suggests that a price reversal to the downside is possible.
Most traders consider the Dark Cloud Cover pattern to be useful only when it occurs after an uptrend or a general price increase. As prices rise, the pattern becomes more important for predicting a potential downward move. The pattern is less significant if the price action is choppy because the price is likely to remain choppy after the pattern.
The following are the five criteria for the Dark Cloud Cover pattern:
- There is an existing bullish uptrend.
- Within that uptrend, an up (bullish) candle.
- The next day, there will be a gap.
- The gap up becomes a down (bearish) candle.
- The bearish candle closes below the bullish candle’s midpoint.
The Dark Cloud Cover pattern is distinguished by white and black candlesticks with long real bodies and short or non-existent shadows. These characteristics indicate that the move lower was both decisive and significant in terms of price movement. Traders may also seek confirmation in the form of a bearish candle that follows the pattern. The price is expected to fall after the Dark Cloud Cover, so if it does not, the pattern may fail.
The bearish candle’s close can be used to exit long positions. Alternatively, if the price continues to fall, traders may exit the next day (pattern confirmed). A stop loss can be placed above the high of the bearish candle if entering short on the close of the bearish candle or the next period.
A Dark Cloud Cover pattern has no profit target. Other methods or candlestick patterns are used by traders to determine when to exit a short trade based on Dark Cloud Cover.
Traders can combine the Dark Cloud Cover pattern with other types of technical analysis. Traders, for example, might look for a relative strength index (RSI) greater than 70, which indicates that the security is overbought. A trader may also look for a break below a key support level after a Dark Cloud Cover pattern as a sign that a downtrend is on the way. Know more about gst dsc error today.