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Dark Cloud Cover Forex


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Let’s now look at out another example of combining a technical study with the dark cloud cover formation. In this example we will combine the Bollinger band indicator with the dark cloud cover. The Bollinger band is a volatility band that can help locate overbought and oversold conditions in the market. Essentially, we can use the Bollinger band to create a mean reversion strategy to find potential reversal points. However, that upside gap is quickly met with strong supply, which pushes the prices lower, ultimately closing below the middle point of the initial candle.

bullish trend

That is to say that an additional technical study or indicator should be utilized in conjunction with this reversal pattern. One of the best ways is to look for the dark cloud cover formation at critical horizontal price levels. When you’re able to identify such a scenario, you will increase the odds of a winning trade. Let’s now look at an example of the bearish dark cloud cover candlestick pattern within the context of an up trending market. Below you can see the price chart of Qualcomm stock shown on the one day timeframe.

What Are the Most Common Mistakes when Trading the Dark Cloud Cover Strategy?

Has a better risk-to-reward ratio than the bearish engulfing pattern. After the new high, the market is expected to close lower than the bullish candle’s midway point. 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. The Bearish Engulfing pattern is a two-candlestick pattern that consists of an up candlestick followed by a large down candlestick that surrounds or “engulfs” the…

Five bearish patterns crypto traders should know – Punch Newspapers

Five bearish patterns crypto traders should know.

Posted: Tue, 21 Dec 2021 08:00:00 GMT [source]

Bearish Candle A Dark Cloud Cover Pattern occurs when a bearish candle on Day 2 closes below the middle of Day 1’s candle. All information on The Forex Geek website is for educational purposes only and is not intended to provide financial advice. Any statements about profits or income, expressed or implied, do not represent a guarantee.

The Dark Cloud Cover Candlestick chart pattern is a bearish reversal pattern consisting of a two day candlestick formation. Like its counterpart, this candlestick chart pattern is only a moderately reliable market indicator of a possible future reversal in price action to the downside. The dark cloud cover forex pattern consists of two candlesticks where the first candlestick creates a bullish green candle that is immediately followed by a second red reversal candlestick.

How to Read Forex Charts

This pattern can be used as a signal for short selling or closing long positions. Traders typically look for the Dark Cloud Cover pattern in a rally in a down-trending market. Confirmation of the reversal can be obtained by monitoring price action over the next few days or by using technical indicators such as Moving Averages, MACD, or RSI.

  • There is a high volume of trading during the formation of both candles.
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  • At the white candlestick, the market is growing actively, and a new local high is set.

The dark-cloud cover is a pattern that comes from the Japanese candlestick techniques and therefore we should have a candlestick chart available. This pattern is a bearish one and it should be interpreted as being a nice possibility for use of SELL orders by the time it is identified but there are clear rules regarding when to do that. The next day, the clouds move in forming a black candle that begins the day with a higher open but closes below the middle of the white candle. If the price action is generally volatile, the dark cloud cover may not necessarily indicate a downtrend since the price movement may pull back and wipe out the losses. 84% of retail investor accounts lose money when trading CFDs with this provider. Self-confessed Forex Geek spending my days researching and testing everything forex related.

The Dark Cloud Pattern Characteristics

The above piercing pattern appeared near a resistance line, or in a resistance area. Technical and fundamental analysis can confirm or reject each other. If you use swing trading and larger timeframes like the daily or the 4hr, the potential for making 100 pips or more profit in one trade is there. The dark cloud is the bearish opposite to the piercing line which is a bullish reversal signal. SMA50, SMA200 – the indicator separately compares the current price to the SMA50 and the SMA50 to SMA200. If the current price is above the SMA50 and SMA50 is above SMA200, this is considered an uptrend.

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Longer the Time Period – More Powerful is the Pattern

It’s important to note that the strategy is limited in its applicability to bullish market conditions, as it is a bearish reversal pattern. In bullish markets, other trading strategies, such as buying calls or buying the underlying asset, may be more appropriate. The dark cloud cover refers to a candlestick pattern in technical analysis that is a bearish reversal signal. It is observed when a “down” candle opens above the close of the previous “up” candle and proceeds to close below the midpoint of the “up” candle within a candlestick chart. As you can see from the above chart, the price was moving steadily higher forming a nice uptrend.

  • It’s important to note that the Dark Cloud Cover pattern is not a guarantee of a trend reversal, but rather a warning sign of potential bearishness.
  • The dark cloud cover strategy is just one of many trading strategies that traders can use to profit from market fluctuations.
  • Our gain and loss percentage calculator quickly tells you the percentage of your account balance that you have won or lost.
  • Both bullish and bearish candles are above average when compared to the bars in the lookback period.

We’ll explain the subtleties of using the SF Trend Lines indicator and the rules for setting Stop Loss and Take Profit. The currency market is going through a week of tension and stress with new forecasts for further action by the US Federal Reserve. In a flat, you can use these patterns to trade bounces off the borders of the range. Take your Profit at important resistant levels or Fibonacci correction lines. As long as this patterns are reversal ones, they are to be looked for on local lows and highs. In flats, the patterns can be used if they form at a bounce off the borders of a local range.

Before trading with any of the brokers, potential clients should ensure they understand the risks and verify that the broker is licensed. On the other hand, if it is moving more to the downside and the red candle is bigger than the green one, then there is a bearish engulfing that formed. We have to analyze the conditions, and choose a good trade setup that has the minimum risk.

That is an oversimplification of the dark cloud cover pattern as there are other candlesticks, such as pin bar candlesticksor bearish engulfing candlesticks, that prove out better in testing. The appearance of a downward price action after the dark cloud cover may be used by trend followers as a signal to exit long positions. Naturally, forex traders need to remember that the position will have inherent risk, since the Bearish Dark Cloud Cover Candlestick chart pattern is only a moderately reliable downside reversal pattern. The second candle consists of a black candle which gaps above the previous day’s high of the white candle and then falls and closes below the midpoint of the white day’s body. The two candlesticks that make up this pattern consist of a bullish white candle observed on the first day and a bearish black candle seen on the second day. The chart example above shows a dark cloud cover forex pattern that formed at the end of a bullish phase before a strong reversal lower followed.

Further reading

First, the size of the negative candlestick plays a key role in determining the probability of selling pressure becoming the dominant form of price action. As the negative candle overlaps more of the initial candle’s body, the strength of the selling is deemed stronger and the probability of confirmation becomes larger. The higher the body of the white candlestick closes, the stronger this signal to buy is.


It must open above the high of the previous candle, and it must close more than halfway down the body of the previous candle. J.B. Maverick is an active trader, commodity futures broker, and stock market analyst 17+ years of experience, in addition to 10+ years of experience as a finance writer and book editor. In the foreign exchange market, this structure is more likely to happen at the start of the trading week since weekend gaps are generally observed during that time. Because it reversal pattern, confirmers are necessary that can be technical and fundamental.