Dark Cloud Cover Candlestick Pattern: A Complete Guide for Traders

Markets don’t go up forever. At some point, momentum slows, and sellers step in. The Dark Cloud Cover candlestick pattern is one of the earliest technical indicators that an uptrend may run out of steam. Many traders watch for it as a potential bearish reversal signal, but it’s not foolproof. Without proper confirmation and context, it can lead to false signals.

This guide breaks down how the Dark Cloud Cover pattern works, what it tells traders about market sentiment, and how it can be used effectively in trading strategies.

The Dark Cloud Cover is a technical indicator in the stock market. This pattern is a bearish reversal pattern that appears after an uptrend. It consists of two candles:

1. A strong, bullish candle that continues the uptrend.
2. A bearish candle that opens above the previous close but then closes below the midpoint of the first candle.

This shift suggests buyers started strong, but sellers took over, pushing the price gap lower and creating a potential trend reversal.

Key Characteristics:

• Forms after an uptrend.
• The bullish candle is the first in a row.
• The second candlestick chart opens higher (gap up) but closes deep into the first candle’s body.
• The deeper the second candle moves into the first candle, the stronger the bearish signal.

Traders see this technical analysis as a sign that the bullish trend is fading and that the market may turn lower.

The Dark Cloud Cover candlestick pattern is illustrated below.

• Appears after an uptrend.
• The first green candle is strongly bullish.
• The second candlestick opens higher but closes below the midpoint of the first candle.
• The pattern suggests a shift from bullish to bearish momentum.
• Confirmation is needed from follow-through selling.

The Dark Cloud Cover tells a story of fading bullish momentum. The first candle continues the uptrend, with buyers in control. The second candle opens even higher, indicating initial bullish pressure. But then, sellers step in aggressively, pushing prices down and closing below the midpoint of the first candle.

This shift signals buyers are losing confidence, and sellers are becoming more dominant. If the next candle follows through with another bearish momentum, traders see it as further evidence that the trend may be reversing.

The Dark Cloud Cover is most effective in uptrends, as it suggests the start of a potential reversal. In range-bound markets, it may indicate short-term selling pressure but might not lead to a full trend reversal.

Volatility Considerations

The pattern may produce false signals in high volatility conditions, as price chart swings can create misleading setups. Traders often look for additional confirmation, such as a break below support or increased volume. The pattern may carry more weight in low volatility environments, as price action tends to be smoother and more controlled.

• Stop-loss placement: Above the high of the Dark Cloud Cover.
• Entry strategy: Traders wait for bearish pattern confirmation (next candle closing lower) before entering short.
• Profit target: Use support levels, resistance levels, or a risk-reward ratio (e.g., 2:1) to set a logical exit.

• No follow-through selling: The reversal signal weakens if the next one is the bullish candle.
• Break above the high of the pattern: A new high invalidates the bearish setup.
• Strong uptrend continuation: The pattern may fail if broader market conditions remain bullish.

To trade the Dark Cloud Cover in a systematic approach:

1. Identify an uptrend before the pattern forms.
2. Detect a Dark Cloud Cover with a bullish candle and bearish second candle closing below the midpoint.
3. Require confirmation: Enter short only if the next candle closes lower.
4. Set stop-loss above the height of the Dark Cloud Cover.
5. Backtest before using real capital.

Traders should always test historical data before trading volume goes live.

Below is a simple AFL script to detect the Dark Cloud Cover in Amibroker:

// Dark Cloud Cover AFL Code for Amibroker

FirstCandle = (Ref(Close,-1) > Ref(Open,-1)) AND (Ref(Close,-1) > Ref(Close, -2));

SecondCandle = (Close < Open) AND (Open > Ref(Close, -1)) AND (Close < ((Ref(Open, -1) + Ref(Close, -1)) / 2));

DarkCloudCover = FirstCandle AND SecondCandle;

PlotShapes(IIf(DarkCloudCover, shapeStar, shapeNone), colorRed, 0, High);

This script finds Dark Cloud Cover patterns in uptrends and marks them with a red star.

The Dark Cloud Cover candlestick can be an early sign of a bearish reversal, but it must be confirmed by follow-through selling. It appears after an uptrend and signals that buyers are losing strength, but traders should always backtest it and use it in the right market conditions.

Using risk tolerance and waiting for confirmation can help avoid false signals. If you want to incorporate this pattern into your strategy, test it in different markets before using it in live trading.

Links to articles about other Candlestick Patterns

1. Doji
2. Hammer
3. Inverted Hammer
4. Bullish Engulfing
5. Bearish Engulfing
6. Morning Star
7. Evening Star
8. Shooting Star
9. Hanging Man
10. Piercing Pattern
11. Dark Cloud Cover
12. Three White Soldiers
13. Three Black Crows
14. Dragonfly Doji
15. Gravestone Doji
16. Spinning Top
17. Marubozu
18. Tweezer Top
19. Tweezer Bottom
20. Bullish Harami 
21. Bearish Harami
22. Rising Three Methods
23. Falling Three Methods
24. Bullish Abandoned Baby 
25. Bearish Abandoned Baby 
26. Bullish Kicker 
27. Bearish Kicker
28. Three Inside Up
29. Three Inside Down
30. Upside Gap Two Crows
31. Mat Hold
32. Upside Tasuki Gap
33. Downside Tasuki Gap