Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning. If the second candle closes below the previous candle’s open, you have a Bearish Engulfing pattern, not a Dark Cloud Cover pattern. If the bears continue to control the market on the next candle, a reversal is likely.

FXOpen is a global forex and CFD broker, with a network of worldwide brokerages regulated by the FCA, CySEC and ASIC. FXOpen offers ECN, STP, Micro and Crypto trading accounts (dependent on entity). You can examine both formations on charts of different assets and on multiple timeframes for free using the FXOpen TickTrader platform.

Dark Cloud Cover: Three Trading Tidbits

It is important to note that traders never use this formation in isolation and confirm it with other technical indicators and analysis techniques to increase the probability of a correct signal. If entering short, the initial stop loss could be placed above the high of the bearish candle. Following the confirmation day, the stop loss could be dropped to just above the confirmation day high in this case.

• If these conditions are met, traders can identify a setup on the trading chart.
• The Dark Cloud Cover pattern is further characterized by white and black candlesticks that have long real bodies and relatively short or non-existent shadows.
• Traders commonly use stop-loss order instructions to limit their potential losses in case the trend reverses again.
• However, technical analysis is more commonly used in price-driven securities, such as commodities and currency markets.

Following the general approach, they place a stop loss above the swing high with the take profit at the next area of support. In this example, the Dark Cloud Cover occurs when the third bullish candle is followed by a bearish candle that opens higher and closes below the midpoint of the last bullish candle. The pattern successfully predicted a downturn in the following session where the price moved nearly seven percent lower. The Dark Cloud Cover pattern is further characterized by white and black candlesticks that have long real bodies and relatively short or non-existent shadows. These attributes suggest that the move lower was both highly decisive and significant in terms of price movement.

Bulkowski on the Dark Cloud Cover Candle Pattern

The main difference between the bearish dark cloud cover and the piercing line is the direction of the trend preceding the formation. The former appears at the end of an uptrend, while the latter appears at the end of a downtrend. Additionally, the piercing line is considered a stronger reversal signal than its counterpart. If these conditions are met, traders can identify a setup on the trading chart.

The former is a bullish reversal setup that appears after a downtrend, while the latter is a bearish reversal formation that appears after an uptrend. The key difference between the two is their direction and the market conditions in which they appear. No, it is a bearish reversal formation that appears on a candlestick chart and indicates a potential trend reversal from an uptrend to a downtrend. It consists of a long bullish candle followed by a long bearish one that opens above the previous candle’s high and closes below its midpoint.

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It is a two-candlestick chart pattern that typically appears at the end of an uptrend and signals a potential bearish reversal in the price of an asset. It consists of a long bullish candlestick, followed by a long bearish candle, where the second candlestick opens above the first candlestick’s high but closes below its midpoint. The piercing line and dark cloud cover are two different candlestick patterns signalling trend reversals.

Clearly, technical analysis is more of a short-term trading discipline that does not involve long-term fundamental analysis of individual securities. The best setup for the dark cloud cover candlestick is for it to appear when price is trending lower. An upward retrace of that down move
appears followed by dark cloud cover. It signals a reversal and when price breaks out downward, and the stock joins the downward primary trend already in existence.

Dark Cloud Cover: Discussion

The best average move 10 days after the breakout belongs to dark cloud cover with upward breakouts in a bear market. We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey. This candlestick pattern is easy to identify because its formation reflects its name.

Traders commonly use stop-loss order instructions to limit their potential losses in case the trend reverses again. At the end of an uptrend (a “sunny day”), a black candle appears (a “dark cloud“), signaling a trend reversal. Traders utilize other methods or candlestick patterns for determining when to exit a short trade based on Dark Cloud Cover. Most traders consider the Dark Cloud Cover pattern useful only if it occurs following an uptrend or an overall rise in price. As prices rise, the pattern becomes more important for marking a potential move to the downside.

Traders would then establish a downside profit target, or continue to trail their stop loss down if the price continues to fall. The Dark Cloud Cover pattern involves a large black candle forming a “dark cloud” over the preceding up candle. As with a bearish engulfing pattern, buyers push the price higher at the open, but sellers take over later in the session and push the price sharply lower. This shift from buying to selling indicates that a price reversal to the downside could be forthcoming. The signal could indicate to traders to exit their long positions of Tesla’s stock or to enter short positions at such points as well.