Stock Trading for BeginnersIn Japanese candlestick charting Dark Cloud Cover is what is known as a two candle bearish reversal pattern, which means that the price has been going up for a specific period of time and it is now reversing and may be headed back down. For this to be valid it needs to occur at the top of an uptrend.
The first candle has a green (or white) real body indicating a higher close, the second candle has a red (or black) body that opens above the body of the first candle but then reverses to close below the middle of the first candle. This reversal is confirmed if the price in the next period is below the low of the second candle.
People of a conservative nature can wait to see if the price closes below the low of the red candle or even of the green candle. Confirmation is not, however, an absolute guarantee of a down trend, it may just be a sideways trend or it may fail altogether, which is why it is important to have stop losses set.
The dark cloud cover indicates that the bullish trend appears to be continuing but the price then turns around as bulls decide to sell and the bears join in. The key is if the price falls below the middle of the first candle, this shakes the confidence of the bulls and increases the confidence of the bears.
For further clarity it is sometime useful to add the two candles together, in this case adding together the two candles of the dark cloud cover pattern gives a shooting star, which is also a bearish reversal pattern.
For more detailed information check out this excellent video from the folks at yourtradingcaoch.com
For other posts relating to stock charts for beginners check out - Stocks and Shares for Beginners - Japanese Candlesticks and Harami Candlestick Pattern
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