There are dozens of bearish reversal patterns and the Dark Cloud Cover chart pattern is one of the most common of these patterns.
Using the Dark Cloud Cover Pattern In Binary Options Trading
Here you will learn more about the Dark Cloud Cover and how you can apply it to your binary options trading strategy.
How do bearish reversal patterns work?
Before delving into the Dark Cloud Cover pattern, let’s first get an idea of what bearish reversal patterns are and how they work.
Bearish reversal patterns usually form using one or more candlesticks. When a reversal occurs, it is an indication that the selling volume has been greater than the buying volume for one or more days. A bearish reversal pattern needs a confirmation otherwise, the pattern would be deemed as neutral or an indication of an impending resistance level.
The confirmation would be in the form of a downward trend characterized by a long, black candlestick or a large decline in trade volume. Typically, a bearish confirmation should occur within 1 to 3 days alongside the pattern formation, given that bearish patterns are usually short-term.
What is a Dark Cloud Cover pattern?
As mentioned earlier, this pattern is a reversal pattern with bearish attributes. As a bearish pattern, it indicates the start of a down trend in the market i.e. an indication that prices will likely decline. As a reversal pattern, the dark cloud cover appears at the top of an upward trend.
The dark cloud comprises of two candlesticks—the first candlestick is bullish while the second and primary candlestick is bearish. This second candlestick opens slightly above the closing price of the bullish candlestick. This second candlestick further goes down to close above the open price of that first, bullish candlestick.
The second candlestick MUST close above the open price of the first candlestick, for the pattern to be a dark cloud; if the second candlestick closes below the open price of the first candlestick, a bearish Engulfing pattern would form.
How to use a Dark Cloud Pattern To Trade
In chart analysis, it is common to spot several Dark Cloud Cover candlestick patterns. However, only a few of these are useful to you as a binary options trader. To enter a trade, it is important that you identify strong and clear Dark Cloud Cover patterns.
Characteristics of a strong Dark Cloud Cover Pattern
For this chart pattern to be identified as being strong, it must meet the following criteria:
a. The first candlestick needs to be large and bullish.
b. The second candlestick needs to be large and bearish and it should cover the majority of the body of the first candlestick.
One more condition needs to be met before entering a trade using the dark cloud cover pattern. The pattern needs to form at the top of a bull market. If the pattern forms when the bulls are too strong, then the risks will be too high and it is advisable not to enter the trade at this time.
However, this does not mean that when the pattern forms at the top of a bull market that is too strong the prices will not reverse. It is possible for the prices to reverse strongly. Even then, it would not be possible to know whether the prices will reverse after the pattern has already formed. Therefore, you have to decide whether to enter a trade based on the pattern that is already on the chart.
It is always recommended that you set a sensible stop loss in every position you take to minimize risk and improve your chances of long-term profit.