What it is — definition
– Dark Cloud Cover is a two-candle bearish reversal pattern on a price chart. It appears after an uptrend and signals a potential shift from buying to selling. The first candle is a strong bullish candle (price closes above its open). The next candle opens above the previous close (a bullish-looking start) but then reverses and closes below the midpoint of the prior bullish candle. That failure to hold gains suggests the upside momentum has been taken over by sellers.
Key jargon (short definitions)
– Candlestick: a price bar showing open, high, low and close for a period.
– Real body: the distance between open and close (shows net directional move).
– Shadow (wick): the lines above and below the body showing intraperiod extremes.
– Confirmation: extra price action after the pattern (usually a further down candle) that supports the reversal signal.
Five criteria (concise)
1. Prior trend: the pattern appears after a visible uptrend or sustained rise.
2. First candle: a bullish candlestick with a relatively large real body.
3. Gap/open: the second candle opens above the prior candle’s close (a gap up).
4. Second candle behavior: the second candle is bearish and its close is below the midpoint of the first candle’s real body.
5. Candle shape: both candles ideally have long bodies and small shadows, meaning decisive moves; the second should be a solid bearish (dark) candle.
Checklist for using Dark Cloud Cover (step-by-step)
1. Confirm an uptrend exists on the time frame you trade (daily, 4‑hour, etc.).
2. Identify two consecutive candles matching the five criteria above.
3. Look for a confirmation candle after the pattern — e.g., another bearish candle or a close below nearby support. Do not rely on the pattern alone.
4. Consider additional filters for conviction: overbought readings (RSI > 70), a resistance zone, or a technical breakdown.
5. If you plan a short entry: place initial stop-loss above the high of the bearish (second) candle. If you exit longs, consider closing on the bearish close or the confirmation day.
6. Define risk and either a profit target based on your system (support levels, measured move, or trailing stop) or a trailing stop to manage the trade.
7. Avoid trading the pattern in choppy, sideways markets where signals often fail.
Worked numeric example
– Setup: daily chart shows a recent uptrend.
– Candle A (bullish): Open = 100, Close = 110. Midpoint = (100 + 110) / 2 = 105.
– Candle B (bearish): Opens at 112 (above Candle A close), sells off during the day and closes at 103.
– Does it meet the pattern? Yes — Candle B opened above the prior close and closed below Candle A’s midpoint (103 < 105).
– Confirmation: On the next day (Candle C) price closes at 98, confirming downside continuation.
– Trade management example (illustrative only, not investment advice): If a trader entered a short on Candle B close (103), an initial stop could be set above Candle B high (say 114). Risk per share = 114 − 103 = 11. If a profit target is set at 90, potential reward = 103 − 90 = 13. Reward-to-risk ≈ 13/11 ≈ 1.18.
Practical notes and limitations
– The pattern’s value grows when it appears after a clear rally and when the candles show decisive bodies (long real bodies, short shadows).
– Without a confirming down candle or other technical evidence (e.g., resistance, overbought indicator, support break), the pattern can fail.
– There is no fixed profit target implied by the pattern itself; traders must use other tools to size exits.
– Like all technical patterns, Dark Cloud Cover offers probabilistic information, not certainty.
Sources for further reading
– Investopedia — Dark Cloud Cover: https://www.investopedia.com/terms/d/darkcloud.asp
– StockCharts (ChartSchool) — Candlestick Patterns: https://school.stockcharts.com/doku.php?id=chart_analysis:chart_patterns:candlestick_patterns
– BabyPips — Candlestick Patterns: https://www.babypips.com/learn/forex/candlestick-patterns
Educational disclaimer
This explainer is for educational purposes and not personalized investment advice. Patterns like the Dark Cloud Cover are probabilistic tools and should be combined with risk management and your own research. Trading involves risk, including loss of principal.