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Candlestick pattern covered in dark clouds (Dark Cloud Cover)

    Dark Cloud Cover (Dark Cloud Cover) is one of the popular reversing Japanese candlestick patterns in financial markets in general and forex in particular. Although this model does not give strong signals as the Bearish Engulfing pattern, it appears continuously on the chart. Therefore, if you understand the characteristics of the model and combine with other technical indicators, the Dark Cloud Cover will become a powerful weapon to help traders exit the order in time when the trend is old. finish as well as find entry points for a new trend. Not only that, trading under the Dark Cloud Cover model also helps traders achieve a quite attractive risk / reward ratio. Therefore, the dark cloud covered by many traders applied when participating in forex trading. Let's learn about this model with the following article.

    What is the Dark Cloud Cover candlestick pattern?

    Previously, the Dark Cloud Cover candle model was often described as a pattern appearing in a bullish candlestick with 2 candles with the following characteristics:

    • The first day is a bullish body with a long body
    • The second day candlestick: Must open above the top of the first day's gap, then a gap is opened, then lower and close below the midpoint of the first day's candle.

    However, because the forex market often creates gaps (price gaps) when trading. So to match, the Dark Cloud Cover model has been described with the following identifying characteristics:

    • The first day is a bullish body with a long body
    • The second day candlestick: It is not necessary that the opening price is above the first candle but it must be bearish and close below 50% of the first candle.

    From the illustration above, you can easily see that if you combine two candles in the Dark Cloud Cover model, we will get a Shooting Star candle, also a very popular reversal candle pattern. variables in forex transactions

    As such, it can be seen that the Dark Cloud Cover pattern usually appears at the top of an uptrend, starting with a long upward body candle, followed by a bearish candlestick falling past the midpoint of the first day's candle. .

    Psychological evolution of the Dark Cloud Cover model (dark clouds covered)

    The Dark Cloud Cover model was created by the following psychological developments:

    The market is going up and going up sharply, the buyers with excitement created a very long body candle and as a result a new peak was created, it seems that the buyers are taking the initiative.

    However, the price unexpectedly met the opposite selling force, pushing the price quite far, down to below the level of the first 50% of the first candle. At this point, the market has rejected the previously created peak and shows that the selling side is still strong enough to control the situation.

    Once the Dark Cloud Cover model has been created, outsiders will begin to doubt whether the price is still strong enough to continue the uptrend. Meanwhile, traders who have entered the previous buy order will feel confused when the price suddenly moves in the opposite direction to buy.

    Factors to keep in mind when using the Dark Cloud Cover model

    According to the technical analysis school, the Dark Cloud Cover candlestick pattern shows weaker signals than the Bearish Engulfing pattern. Therefore, when using this model, traders need to keep in mind the following factors in order to increase the probability of winning when entering the order:

    • Trading volume at the opening of the second day candlestick is large: It shows that many traders have fallen into the trap and may find a way to exit the order, creating selling pressure.
    • The deeper the second candle is, the deeper the candle is, the higher the probability of breaking the peak
    • If the market is in an uptrend, with higher highs and lows, the Dark Cloud Cover model will work better if the price has entered the overbought zone. We can use indicators like RSI or Stochastic to check this.

    • When the market is moving in a trading range, the price moves up and down between the resistance / support areas, the Dark Cloud Cover model will work better if it happens right at the resistance level. distance.

    Trading guide with the Dark Cloud Cover candle pattern

    Entry point command

    There are two ways to enter commands for the Dark Cloud Cover model.

    The first way is that we will enter the order as soon as the second candle of the pattern ends. The second way is to patiently wait for another candle, if this candle continues to fall and break through the first candle. The second way to enter the command will be safer and more sure, but the Risk / Reward ratio will not be attractive by entering the first command.

    Profit-taking and stop-loss points

    Studies have shown that the Dark Cloud Cover pattern will often be broken if the top of the pattern is broken, so we can place a stop loss right above the just created peak. Profit-taking points will be set at the supports below.

    summary

    The Dark Cloud Cover pattern is a reversal candle pattern, similar to Bearish Engulfing. This pattern appears at the end of an uptrend and at the beginning of the downtrend and therefore gives a very attractive Risk / Reward ratio. However, in order to increase the probability of success using this Dark Cloud Cover model, we need to combine the use of other technical indicators or analysis of support / resistance areas, depending on the state of the market. The market is trending or moving within a trading range.


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    Author: Tin Nguyen

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