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Let’s imagine the following: the market has been on an upward trend with a strong green or white candle, but suddenly a bold red or black candle appears, stealing the show. This new candle not only opens above the previous one's closing point, but it also dares to close below its midpoint.
<source: HowToTradeBlog>
Dark Cloud Cover, a fascinating candlestick pattern, signals a potential shift in the market's momentum.
What's the significance of this dramatic turn of events? It hints at a possible change in direction, with the market momentum swinging from bullish to bearish. To make this pattern more reliable, both candles should be relatively large, reflecting the active participation of traders and investors. Smaller candles, however, might not carry the same weight.
Now, for the cherry on top: if the following candle also shows a drop in price, that's the confirmation traders are looking for. This further decline solidifies the Dark Cloud Cover's message, suggesting that the market could continue heading downwards.
<source: MyPivots>
Now let’s imagine the following: you're watching the market as it enjoys a nice uptrend, and suddenly, a mysterious "dark cloud" appears, casting a shadow over the previous bullish candle. This Dark Cloud Cover pattern is like a plot twist in a thrilling financial thriller, potentially signaling a bearish reversal.
In this gripping tale, buyers start off with a strong push, but as the story unfolds, sellers take the reins and drive prices down, hinting at a possible shift in momentum. But don't jump to conclusions just yet! This pattern is most meaningful when it emerges after a solid uptrend or a general rise in price. If the market's been choppy, the Dark Cloud Cover might not be as significant.
For this intriguing pattern to unfold, there are five key elements:
A bullish uptrend that's well-established.
A green (bullish) candle enjoying the uptrend.
A surprising gap up the next day.
The gap up transformed into a red (bearish) candle.
The bearish candle closing below the midpoint of the previous bullish candle.
Decisive Moves: Candle Characteristics and Confirmations
In this captivating story, white and black candles with long bodies and short (or non-existent) shadows suggest a decisive and substantial move downwards. Traders also look for a confirming bearish candle after the pattern, expecting the price to decline.
When the Dark Cloud Cover pattern appears, traders may use the close of the bearish candle to exit long positions or wait for the next day to see if the price continues to drop. If shorting, a stop loss can be placed above the high of the bearish candle.
But what about profit targets? The Dark Cloud Cover doesn't provide any, so traders must rely on other methods or candlestick patterns to determine when to exit a short trade.
Beyond the Dark Cloud Cover: Additional Technical Analysis Tools
For an extra twist, traders may combine the Dark Cloud Cover pattern with other technical analysis tools. They could look for a relative strength index (RSI) greater than 70, indicating overbought conditions, or watch for a breakdown from a key support level as a sign that a downtrend might be on the horizon.
So, keep an eye out for the Dark Cloud Cover pattern, and be prepared for the unexpected turns the market can take!
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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.