How to Identify & Trade Dark Cloud Cover Patterns

  • June 1, 2018

Watch our video on how to identify and trade dark cloud cover patterns.

What Is a Dark Cloud Cover Pattern & How to Identify These Patterns?

  • A dark cloud cover pattern consists of two candlesticks that form near resistance levels where the 2nd candle covers half or part of the 1st candle. Typically, when the 2nd candle forms, it can't hold above the first candle and causes a failure.

These patterns are 3 candlestick patterns. This pattern can signal a bearish reversal in a bullish trend. Watch our video above to learn more about how to trade them.

This patterns is more effective on a daily chart rather than a shorter time frame. Options trading as well as swing trading can benefit from this pattern.

Chart patterns are made up of candlesticks showing a tug of war between buyers and sellers. This tug of war forms patterns that allow us to gauge how other traders are feeling.

Candlesticks tell stories on their own and make up patterns when grouped together. They form key levels of support and resistance hence the importance of knowing candlesticks when stock trading.

1. Dark Cloud Cover Patterns

Dark cloud cover patterns form when a bearish candlestick forms a "dark cloud" over a bullish trend. The bearish candle opens above a bullish candle's close with a confirmation candle forming; hence the 3 candle pattern.

The bulls push price higher at the open but the bears ultimately took over. This causes the price to be pushed lower and the bears are in takeover mode.

This takeover is a sign that there could be a bearish reversal coming. The dark cloud cover is a sign of an impending storm. The sunny days are almost over.

A dark cloud cover pattern is made stronger if the candle closes below the low of the confirmation candle. From there price can move down.

It's important to get conformation of a reversal before going short or buying/selling put options. The third candlestick is typical a member of the doji candlesticks family. Those indecision candles can let the bulls back in (bookmark our penny stocks list and stock watch lists pages, which are updated daily).
Dark Cloud Cover Patterns

2. Technicals of Dark Cloud Cover Patterns

There are 5 different things dark cloud cover patterns need. First you need an existing bullish trend. You can't have a bearish reversal takeover without a bullish trend in place.

Next you need a bullish candlestick within the uptrend. This is the first candle in the dark cloud cover pattern.

Third, the second candle should begin the day gapped up. When you see that at the open you might be inclined to think it part of the gap up patterns you see on charts and go bullish. Unless you caught it the day before and sold at the open, you're going to be disappointed.

Fourth and the reason why you'd be disappointed is because the gap closes and turns into a bearish candle. Bulls started the day in control but the bears came in and closed the gap driving price down.

Last and the 5th thing, the bearish candle should close below the midpoint of the bullish candle from the previous day. Those first 2 candles should have long real bodies with little to no wicks.

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dark cloud cover patterns

The chart for A was in an uptrend when the dark cloud cover pattern formed. Instead of falling after the confirmation candle it traded sideways. You can see about 4 different doji candles such as inverted hammer candlesticks or high wave candlesticks along with gravestone doji candlesticks. It finally picked a direction after indecision. You could have traded the bear flag patterns down.

How to Trade Dark Cloud Cover Patterns

  1. How to trade dark cloud cover patterns:
  2. Watch for 1st top candlestick to form
  3. Next, watch for 2nd candlestick to cover half or part of 1st candle
  4. Then, watch for 3rd candlestick to fall below 2nd
  5. Traders take a short once price breaks below the 2nd candlestick
  6. Place stop at top of the 2nd candle
  7. Some traders take a long position once price breaks above 2nd candle
  8. Then place stop below the 2nd candle

Technical analysis is really important when trading these patterns. By now you've learned that sometimes reversal patterns don't pan out.

Looking at things like moving average lines, RSI and MACD can help to determine the direction of a stock. Moving average lines act as support levels when candlesticks are trading above them.

If a stock is overextended it'll move back to those moving average lines. If it's riding the moving average lines, price would have to break and hold. That turns support into resistance.

As you know, traders are well aware of support and resistance. Take our candlestick reversal patterns course.

dark cloud cover patterns

You can see the bull flag patterns as MO was trading up. The dark cloud cover formed but it didn't reverse for awhile. It traded sideways while riding the 9 EMA. RSI was overbought so eventually it did reverse. But it didn't happen right away.

1. Patterns Inside Patterns

We all know that patterns set up and break down all the time. You can zoom out and see the big patterns forming. When you zoom in you see the smaller patterns like the dark cloud cover patterns forming.

It's so important to be able to see the big and the small patterns when going to place a trade. You can see in the charts posted, that the bearish reversal didn't happen as soon as a dark cloud cover formed.

Why not? It's a reversal pattern. It stands to reason that when the pattern forms the reversal happens. That's not how it works in the real world.

Zoom out and see if it was apart of a larger maybe strong bullish pattern. The breakdown makes more sense then.

In Conclusion

Dark cloud cover patterns are bearish reversal patterns that may not happen right away. Look at the technicals and the big patterns. Get confirmation of a move before making a trade.

Using the tools provided to you give you the knowledge to make good trades. Not every trade will go your way though. Cut your losses quickly and keep going. Take our free online trading courses.

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