The Dark Cloud Cover Pattern is a widely recognized candlestick pattern among traders. This article will provide valuable insights on how to incorporate this pattern into your trading strategy. Despite its subtle nature, we will offer a comprehensive guide on how to spot the Dark Cloud Cover pattern and leverage it in your trading approach.
In addition to this, a well-rounded trader should have a diverse portfolio. Therefore, we will provide you with three alternative trading approaches that are ideal for trading in various markets, such as Stocks, Cryptocurrencies, Commodities, Forex, and even NFTs.
However, it is important to note that successful trading with candle charts goes beyond just recognizing patterns. You must also consider the context of risk and reward before making a trade based solely on a candle pattern. A thorough understanding of risk/reward analysis is crucial for making informed trading decisions.
The dark cloud cover pattern is a reversal pattern that signals a top reversal after an uptrend or at the top of a congestion band. This two-candle pattern consists of a strong green candle followed by a red candle that opens above the prior session high but closes deeply within the first green candle’s body. To confirm the pattern, Japanese technicians often require more than 50% penetration of the red candle into the green candle or wait for another bearish confirmation on the following days.
However, the dark cloud cover pattern is not as straightforward as other patterns, so you must be mindful of other factors that could increase its significance. For instance, the greater the penetration of the red real body’s close into the prior green real body, the higher the likelihood of a top.
The following three strategies are universal and can be applied to any asset class.
Let’s dive into the first trading strategy, which uses the Parabolic SAR and the Moving Average with the EMA Cross. As a live demonstration in the chart, we decided to trade the price movement of CORN commodity.
The Parabolic SAR is a technical analysis indicator that uses dots above or below price bars to indicate potential reversal points in the direction of the trend. The dots move in relation to price and accelerate as the trend continues, making it also useful for trailing stop-loss orders.
The Moving Average with the EMA Cross strategy combines two exponential moving averages (EMAs) of different time periods to identify bullish or bearish trends. In this case, the length of the MA is 10, and the length of the EMA is 10. When the shorter EMA crosses above the longer EMA, it suggests a bullish trend, while a cross below indicates a bearish trend. It’s a popular and simple strategy that helps you to identify entry and exit points.
Ok, now let’s analyze the charts. The sideways market trend seen in early July 2022 is a precursor to a strong push in the market, followed by the formation of a textbook Dark Cloud Cover Pattern the following day, suggesting a short position.
The Moving Average indicator also indicates a trend reversal on the same day. However, the real standout in this trade is the Parabolic SAR, as the blue dot appears above the second red candle of the pattern, signaling a short position and setting the point at which you should place a stop-loss to protect their investment.
When trading this pattern, you have the option to enter the short position either after spotting the pattern or, alternatively, after seeing the EMA Cross, allowing for greater security in the trade.
If you had taken the safe route, you could have shorted the pattern from roughly 760 to 620, potentially yielding a significant profit when trading with leverage.
The second trading strategy utilizes two technical indicators, namely the Rate-of-Change (ROC) indicator and the Accumulative Swing Index (ASI), to identify potential anomalies in short-term price movements. For this example, we are trading the cryptocurrency Cardano (ADA); however, this strategy would apply to almost every other asset.
The Rate of Change (ROC) is a momentum oscillator that measures the percentage change in price between the current price and a previous price. A positive ROC indicates upward momentum, while a negative ROC indicates downward momentum.
The Accumulative Swing Index (ASI) is a trendline indicator that uses an asset’s open, high, low, and close to calculate its value, with positive values indicating an uptrend and negative values indicating a downtrend. It’s a useful tool for determining trend strength and potential trend reversals.
In this case, we wanted to capture the short-term volatility within the cryptocurrency market. Based on the 1-hour chart of Cardano, an uptrend is imminent as the ROC has recently crossed the 0 line (at 09:30), and the ASI is also trending upwards.
Moreover, a Dark Cloud Cover formation is observed in the chart, albeit not perfect, as it only shows a slight increase in the opening price compared to the previous close of the green candle. Nonetheless, it is still valid in this case as it moves around 50% into the first candle’s real body, which is consistent with the Japanese traders’ practice.
Upon closer inspection, the ROC indicates that a peak was reached when it touched 7.5 and went straight to 5 after the close of the second candle. The ASI also confirms that the trend is going down, providing a good opportunity to open a short position at this level with a stop loss at the top of the second candle.
While it is recommended to close the trade once the ROC crosses the 0 line, the ASI is not showing a significant uptick, suggesting that you may consider holding onto their positions for a bit longer and only exit once they see the trend turning upwards again.
By incorporating these two indicators, you can effectively monitor the short-term volatility in the cryptocurrency market and make informed decisions based on potential anomalies detected by the ROC and ASI.
The third strategy focuses on the SuperTrend indicator, one of our favorites, which complements candlestick patterns well. To show a live trading scenario, we decided to trade on a unique market, available only on Morpher, which is AZUKI NFTS, a famous NFT art project. This trend indicator shows when to stay long and when to enter a short position.
Following a longer uptrend, we observe a nearly perfect pattern on the 4-hour chart, with the second candle opening at a new high and closing deep into the real body of the first green candle. Given that candlestick patterns are relatively untested in new markets like this, we advise using a stop-loss and a reliable indicator as confirmation.
At this point, we could wait for the SuperTrend to turn red and the short candle to appear for additional confirmation. If we had followed this indicator, it would have given us a nice short trade from around 12 to 10. Since this is a strong pattern with excellent confirmation, leveraging the trade could have yielded a significant profit.
When trading candlestick patterns, having the right platform is crucial to success. Here are some key factors to consider when choosing the best platform:
If you’re looking for a platform that offers all of these features, Morpher is a great choice. It’s specifically designed to provide the best trading experience possible, with maximum flexibility, a wide range of assets to trade, great indicators and an advanced chart view, infinite liquidity, and zero fees.
In conclusion, these patterns have proven to be valuable tools for making profitable trades. By incorporating the Dark Cloud Cover Pattern into your trading strategy and using technical indicators to identify market trends, you can maximize your chances of making informed trading decisions.
Disclaimer: All investments involve risk, and the past performance of a security, industry, sector, market, financial product, trading strategy, or individual’s trading does not guarantee future results or returns. Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on an evaluation of their financial circumstances, investment objectives, risk tolerance, and liquidity needs. This post does not constitute investment advice.
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