How to Trade with Dark Cloud & What is it?

How do you predict market weather when there is dark cloud cover

Another member of the Japanese candlestick family, the dark could cover pattern indicates possible trend reversal following a steady upward rise. It is found in an uptrend. A bullish green candle is followed closely by a red bearish candle, which forms an uptrend but closes below its midpoint.

Forex candlesticks use the dark cloud pattern to identify a possible trend reversal.

As in equity trading, candlestick charts are used extensively in forex. Forex candlestick charts provide traders with a variety of information about forex price movements, which can help them to develop effective trading strategies. These charts are halfway between the traditional bar charts and the more sophisticated 'Renko’ charts.

How do you spot a dark cloud in candlestick charts

A dark cloud cover is a sign of a trend reversal. Although it is easy to spot, if you are new to investing, you will need to practice to identify other candlestick patterns.

Two candles are grouped together to create a dark cloud-cover pattern. One green candle is part of the upward trend and the other red bearish candle closes below the midpoint. This is an indication that there may be a trend reversal. Before taking a position, traders should confirm this with other trading tools.

Key points to remember

• A dark cloud-covered candlestick pattern is seen in an uptrend. This Indicates a trend reversal
• It is a mixture of a bullish red candle and a green bearish candle. The red candle closes below midpoint of the green candle.
• The bearish candle opens higher that the green one. This is known as market gap.
• Both candles have high real-bodies with short shadows or none, indicating strong trading participation
• After the red candle, a third bearish candle appears. It is called the confirmation.
• This indicates a shift of momentum. However, traders must confirm it with other trading tools.

What can a dark cloud cover reveal about you?

In an uptrend, the larges bearish candle opens above that of the bullish candle. This means that buyers initially controlled the market, pushing it higher, but bearish forces eventually took control and the price closed below the bullish green candle's midpoint. It is valid even if it appears in an uptrend as it is a bearish indicator. Also, candles must be large in size. As they don't have the potential to cause a shift in momentum, short-bodied candles are often overlooked. The third is that the pattern is more important if it closes lower than the midpoint on a green candle.

An uptrend pattern is more reliable than similar patterns that appear in a turbulent market. For better risk-reward ratio, traders should exit their long positions and enter short when the pattern appears. They might wait to confirm the pattern, which could be a short red candle that appears next to the dark.

Candlestick patterns can be seen as visual patterns. There is no calculation involved. Technical trading tools are also needed to plan exits. They may place a stop loss above the peak of the bearish candle. They can also look at the relative strength indicator (RSI) momentum oscillator. A RSI above 70 indicates overbuying and the market could fall. The onset of a downtrend is also indicated by a breakdown at a key support level following a dark cloud cover.

Conclusion

There are many ways to determine if a dark cloud formation is a sign of a downtrend. It is often used by traders in conjunction with trendlines, support and resistance lines and the stochastic oscillator to confirm. If traders want to get out of a long position, they might consider exiting at either the end or next day's bearish candle. Traders who plan to enter at this time should also place their stop-loss higher than the bearish candle's higher point.