The dark-cloud cover is a pattern that comes from the Japanese candlestick techniques and therefore we should have a candlestick chart available. This pattern is a bearish one and it should be interpreted as being a nice possibility for use of SELL orders (or PUT options) by the time it is identified but there are clear rules regarding when to do that.
- Because we are looking to the downside, in case of binary options, it means price at the expiration date should be lower than the striking price and this is why we’re buying the put options.
- Since we are expecting lower price in the future, in case we are using CFDs to trade on currencies, we should trade SELL contracts.
The pattern implies two different candles, the first one to be green and the second one red and the first condition to look for is that they should come after a bullish trend because they signal the possible end of a bullish trend so we should look for bearish conditions from that moment on cloud cover is identified we should go with SHORT trade, right at the moment price is closing the red candle out of this formation. Regarding binary options, depending on the time frame the pattern is identified, we should choose different expiration dates. The videos we added are showing concrete examples with such a pattern and how they should be traded and, most importantly, when to enter positions.
Dark Cloud Cover Must Follow a Bullish Trend
One of the trickiest things here and consider this as a trap most people forget about is the fact that the dark-cloud cover MUST come after a bullish trend, so small corrections should be avoided. Dark-cloud cover pattern is the opposite of the piercing pattern, with the sole difference that one is a bullish pattern and the other one is a bearish one.
As mentioned at the beginning of this article, the dark-cloud cover is a bearish pattern and it means that we should buy SELL CFDs or trade PUT options only when it is formed.
Longer the Time Period – More Powerful is the Pattern
The usual caveat applies here too in the sense that the bigger the time-frame, the most powerful the pattern is. For binary options traders, it is not that important that the expiration date chosen for the put option to be as big as the time frame, as the dark-cloud is quite a powerful pattern and it implies little or no retracement.
If used in coordination with other indicators, like the Ichimoku Kinko Hyo it may prove even more powerful as if the dark-cloud cover is touching the Tenkan line (the red line in the Ichimoku Kinko Hyo indicator) then we may say that a true reversal is possible.
How To Spot Dark Cloud Cover?
What makes the dark-cloud cover different when compared with the bearish engulfing is that the second candle ( as this is a group of two candles), the red ones, must go more than 50% into the territory of the previous green candle as otherwise it is just a simple and regular two candles group.
On the other hand, if it is moving more to the downside and the red candle is bigger than the green one, then there is a bearish engulfing that formed.
Reversal Patterns in Candlestick Charts
The Japanese candlesticks are offering something for every type of trader but the most powerful patterns are the reversal ones. This is because anyone is looking for finding the top or the bottom of a specific trend and when this can be identified with the help of only two candles, than a great competitive advantage is created. Avoiding the smaller time frames is key as, like in any candlestick pattern, they are pretty much obvious to any other trader and market will always try to take the top in this case.
Avoid Dark Cloud Cover Before Economic Reports Are Scheduled
Another thing to avoid is trading such a pattern in front of economic releases, especially the vital ones. It is a well known by now that market is moving based on how HFT (High Frequency Trading) robots and trading algorithms are interpreting the economic release. If the economic news is better than expectations, these robots are instructed to buy or sell a specific financial product and they are not taking into account anything else. After all, they are robots.
Finally, but probably the most important thing of them all, especially when it comes to interpreting candlestick patterns: it is vital to wait until the final candle in the pattern is closing. If not, what may seem like a dark-cloud cover on the daily chart one hour before the closing of the candle, may turn out one hour later to be a fake move.