Dark Cloud Cover

What Is the Dark Cloud Cover?

Dark Cloud Cover is a bearish reversal candlestick pattern where a down candle (regularly black or red) opens over the close of the prior up candle (commonly white or green), and afterward closes below the midpoint of the up candle.

The pattern is critical as it shows a shift in the momentum from the upside to the downside. The pattern is made by an up candle followed by a down candle. Traders search at the cost to proceed with lower on the next (third) candle. This is called confirmation.

Understanding Dark Cloud Cover

The Dark Cloud Cover pattern includes a large black candle forming a "dark cloud" over the former up candle. As with a bearish engulfing pattern, purchasers push the price higher at the open, yet venders take over later in the session and push the price pointedly lower. This shift from buying to selling shows that a price reversal to the downside could be impending.

Most traders consider the Dark Cloud Cover pattern helpful provided that it happens following a uptrend or an overall rise in price. As prices rise, the pattern turns out to be more important for denoting a likely move to the downside. In the event that the price action is choppy the pattern is less huge since the price is probably going to stay choppy after the pattern.

The five criteria for the Dark Cloud Cover pattern are:

1. An existing bullish uptrend.
2. An up (bullish) candle inside that uptrend.
3. A gap up on the next day.
4. The gap up transforms into a down (bearish) candle.
5. The bearish candle closes below the midpoint of the previous bullish candle.

The Dark Cloud Cover pattern is additionally portrayed by white and black candlesticks that have long real bodies and relatively short or non-existent shadows. These properties recommend that the move lower was both highly conclusive and critical in terms of price movement. Traders could likewise search for a confirmation as a bearish candle following the pattern. The price is expected to decline following the Dark Cloud Cover, so on the off chance that it doesn't that demonstrates the pattern may fail.

The close of the bearish candle might be utilized to exit long positions. On the other hand, traders might exit the next day assuming that the price keeps on declining (pattern confirmed). If entering short on the close of the bearish candle, or the next period, a stop loss can be set over the high of the bearish candle.

There is no profit target for a Dark Cloud Cover pattern. Traders use different methods or candlestick patterns for determining when to exit a short trade in light of Dark Cloud Cover.

Traders might utilize the Dark Cloud Cover pattern related to different forms of technical analysis. For instance, traders could search for a relative strength index (RSI) greater than 70, which gives a confirmation that the security is overbought. A trader may likewise search for a breakdown from a key support level following a Dark Cloud Cover pattern as a signal that a downtrend might be impending.

Illustration of Dark Cloud Cover

The accompanying chart shows an illustration of the Dark Cloud Cover pattern in the VelocityShares Daily 2X VIX Short Term ETN (TVIX):

In this model, the Dark Cloud Cover happens when the third bullish candle is trailed by a bearish candle that opens higher and closes below the midpoint of the last bullish candle. The pattern effectively predicted a downturn in the accompanying session where the price moved almost seven percent lower. That session gave confirmation.

Traders who were long could consider exiting close to the close of the bearish candle or on the next day (confirmation day) when the price dropped. Traders could likewise enter short situations at these points also.

In the case of entering short, the initial stop loss could be set over the high of the bearish candle. Following the confirmation day, the stop loss could be dropped to just over the confirmation day high in this case. Traders would then lay out a downside profit target, or proceed to trail their stop loss down in the event that the price keeps on falling.

Highlights

• The two candles ought to be relatively large, showing strong participation by traders and investors. At the point when the pattern happens with small candles it is regularly less huge.
• Dark Cloud Cover is a candlestick pattern that shows a shift in momentum to the downside following a price rise.
• Traders normally check whether the candle following the bearish candle additionally shows declining prices. A further price decline following the bearish candle is called confirmation.
• The pattern is made out of a bearish candle that opens above however at that point closes below the midpoint of the prior bullish candle.