Everything that you need to know about the Dark Cloud Cover candlestick pattern is here.
Today you’ll learn:
- What Is The Dark Cloud Cover Candlestick Pattern
- How To Identify The Dark Cloud Cover Candlestick Pattern
- Variants of the Dark Cloud Cover Candlestick Pattern
- How To Trade The Dark Cloud Cover Candlestick Pattern
- Strategies To Trade The Dark Cloud Cover Candlestick Pattern
- Strategy 1: Pullbacks On Naked Charts
- Strategy 2: Trading The Dark Cloud Cover With Resistance Levels
- Strategy 3: Trading The Dark Cloud Cover With Moving Averages
- Strategy 4: Trading The Dark Cloud Cover With RSI Divergences
- Strategy 5: Trading The Dark Cloud Cover With Fibonacci
- Strategy 6: Trading The Dark Cloud Cover With Pivot Points
- This is what you learned today
- Learn More
What Is The Dark Cloud Cover Candlestick Pattern
The Dark Cloud Cover is a Japanese candlestick pattern.
It’s a bearish reversal pattern.
Usually, it appears after a price move to the upside and shows rejection from higher prices.
The pattern is bearish because we expect to have a bear move after a Dark Cloud Cover appears at the right location.
It’s a reversal pattern because before the Dark Cloud Cover appears we want to see the price going up, thus it’s also a frequent signal of the end of a trend.
The Dark Cloud Cover pattern is also a mirrored version of the Piercing candlestick pattern.
How To Identify The Dark Cloud Cover Candlestick Pattern
The Dark Cloud Cover candlestick pattern is formed by two candles.
Here’s how to identify the Dark Cloud Cover candlestick pattern:
- The first candle is bullish
- The second candle is bearish
- The open level of the second candle must be above the first candle (there’s a gap there)
- The close of the second candle must be below the 50% level of the body of the first candle
It looks like this on your charts:
Variants of the Dark Cloud Cover Candlestick Pattern
The Dark Cloud Cover candlestick pattern may appear a little different on your charts.
The candles may have wicks at the top. The red one, the green, or even both, showing even more rejection from the upside.
Here’s what it may look like on your charts:
How To Trade The Dark Cloud Cover Candlestick Pattern
To trade the Dark Cloud Cover candlestick pattern it’s not enough to simply find a pattern with the same shape on your charts.
Let me explain.
What makes a pattern valid is not just the shape, but also the location where it appears.
This means that the same shape appearing at different locations may have different meanings.
When trading the Dark Cloud Cover, we want to see the price first going up, making a bullish move.
A Dark Cloud Cover appearing after this bullish move is a sign of a possible reversal to the downside.
It looks like this:
Now you’re thinking.
“When do I open my trade?”
It’s simple, the Dark Cloud Cover pattern is traded when the low of the last candle is broken.
That’s your conservative trigger to short.
It looks like this:
Now, you also want to protect yourself because when trading things don’t always move as we expect.
And for that, we use a stop loss.
There are several different types of stop losses.
The most common is to use the other side of the pattern to set it.
But wait, don’t jump into trading the Dark Cloud Cover right yet.
There are a few more things to know.
Ideally, to increase the accuracy, we want to trade the Dark Cloud Cover candlestick pattern by combining it with other types of technical analysis or indicators.
Here are a few strategies to trade the Dark Cloud Cover pattern.
Strategies To Trade The Dark Cloud Cover Candlestick Pattern
Strategy 1: Pullbacks On Naked Charts
As a bearish reversal pattern, the Dark Cloud Cover is a great pattern to watch for when the price is on a downtrend.
Just wait for a pullback to start, and then spot when the Dark Cloud Cover appears.
That often signs the end of the pullback and the start of the new leg to the downside.
Here’s an example:
Strategy 2: Trading The Dark Cloud Cover With Resistance Levels
Support and resistance levels are great places to find price reversals.
Since we are looking for moves to the downside, we want to trade the Dark Cloud Cover using resistance levels.
How does it work:
- Draw resistance levels on your charts
- Wait for the price to go up and hit the resistance level
- Check if a Dark Cloud Cover appears at that level
- Short when the price breaks the low of the last candle of the Dark Cloud Cover
- Set your stop loss and take profit levels, and expect a move to the downside
Here’s an example:
Strategy 3: Trading The Dark Cloud Cover With Moving Averages
Moving averages are great trading indicators to trade trends.
The idea here is to trade pullbacks to the moving average when the price is on a downtrend.
How does it work:
- Find a downtrend, with the price jumping below a moving average
- Wait for the price to go up and hit the moving average
- Check if a Dark Cloud Cover appears at the moving average
- Short when the price breaks the low of the last candle of the Dark Cloud Cover
- Set your stop loss and take profit levels, and expect another leg to the downside
Strategy 4: Trading The Dark Cloud Cover With RSI Divergences
This is a bit different from the other trading strategies.
To find a bearish RSI Divergence we want to see the price on an uptrend first, making higher highs and higher lows.
Here’s how it works:
- Find an uptrend
- Mark the highs that the price makes after each leg to the upside
- At the same time compare the price highs with the RSI indicator
- When you see the RSI making lower highs while the price making higher highs, you found your divergence
- Now you wait until a Dark Cloud Cover appears at a price higher high, aligned with an RSI lower high.
- Short when the price breaks the low of the last candle of the Dark Cloud Cover
- Set your stop loss and take profit levels, and expect a move to the downside.
It looks like this:
Strategy 5: Trading The Dark Cloud Cover With Fibonacci
Another popular way of trading the Dark Cloud Cover pattern is using the Fibonacci retracement tool.
Fibonacci shows retracement levels where the price will tend to revert frequently.
Depending on the strength of the trend, different levels are more likely to work better with the Dark Cloud Cover pattern. Here you can learn more about the different Fibonacci retracement levels.
Here’s how the strategy works:
- You want to see the price on a downtrend, or at the start of a new one
- Then you wait for a move to the upside, they always happen at some point
- Pick your Fibonacci tool and draw the levels from the high to the low of the move
- When the price hits a Fibonacci level and prints a Dark Cloud Cover, that’s what you are waiting for
- Short when the price breaks the low of the last candle of the Dark Cloud Cover
- Set your stop loss and take profit levels, and expect a move to the downside
Strategy 6: Trading The Dark Cloud Cover With Pivot Points
Pivot Points are automatic support and resistance levels calculated using math formulas.
If you are day trading, the Daily Pivot Points are the most popular, although the Weekly and Monthly are frequently used too.
Here’s how to trade the Dark Cloud Cover pattern with Pivot Points:
- Activate the Pivot Points indicator on your charts
- Check which Pivot Points are above the price, those will tend to work as a resistances
- Ideally, you want to see the price on a downtrend, although it’s not required
- Wait for a price move to the upside to a Pivot Point level
- At that level, you want to see a Dark Cloud Cover pattern appearing, meaning that the level is being rejected
- Short when the price breaks the low of the last candle of the Dark Cloud Cover
- Set your stop loss and take profit levels, and expect a move to the downside
This is what you learned today
- The Dark Cloud Cover is a two-candle pattern.
- To be valid, it must appear after a move to the upside.
- It’s a bearish reversal pattern, meaning that it signs a potential reversal to the downside.
- To increase the accuracy, you can trade the Dark Cloud Cover using pullbacks, moving averages, and other trading indicators.
Now I want to hear from you.
Do you trade the Dark Cloud Cover candlestick pattern?
Let me know in the comments below.
Learn More
- List of all candlestick patterns explained
