Dark Cloud Cover Candlestick Pattern – What Is And How To Trade

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
What Is The Success Rate Of The Dark Cloud Cover?
This is what you learned today
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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

What Is The Success Rate Of The Dark Cloud Cover?

According to the Encyclopedia of Candlestick Charts by Thomas N. Bulkowski (link), the Dark Cloud Cover candlestick pattern has a success rate of 63%.

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.
The winning rate of the Dark Cloud Cover pattern is 63%.

Now I want to hear from you.

Do you trade the Dark Cloud Cover candlestick pattern?

Let me know in the comments below.