The dark cloud cover is a Japanese candlestick pattern that loses $5.40 and $5.00 in the forex and stock markets, respectively, on average per $100 risked.
It only occurred twice in the crypto markets between 2015 and 2022 to produce any meaningful results.
That doesn’t sound great, right?
But imagine if history can tell us a different way to trade this pattern that’s profitable across both forex and the stock market?
Would you be excited?
If so, keep reading to shine a light on this dark cloud cover pattern and learn how to trade it in a data-driven way.
What Is a Dark Cloud Cover Candlestick Pattern?
The dark cloud cover candlestick pattern is a two-bar pattern that supposedly signals a bearish reversal. However, as we’ll soon see, this supposed bearish reversal candlestick pattern is a bunch of bull.
But before we cover that, let’s learn how to identify this dark cloud cover on our candlestick charts.
How to Identify the Dark Cloud Cover Candlestick Pattern
The following are the requirements for a valid dark cloud cover pattern:
- The first candle must be a long white candle.
- The second candle must open above the prior candle’s high.
- The second candle must close within the first candle’s real body, ideally below the midpoint.
- The pattern must occur during an uptrend.
We see the dark cloud cover candlestick pattern on the Apple (AAPL) daily chart on December 13th, 2021.
Price is in a bullish trend as it’s above the fifty-day moving average. The first candlestick is bullish with a large long real body. The second candlestick opens above the prior high and closes below the midpoint of the preceding candlestick completing the pattern.
Now that we know how to identify the dark cloud cover, how do we profit from these two candlesticks?
How to Trade the Dark Cloud Cover Candlestick Pattern
The dark cloud cover should be traded using a bullish continuation in the forex and stock market.
In other words, this pattern isn’t a trend reversal but a bullish continuation.
But before we learn how to trade the dark cloud cover optimally, let’s gain context and understand how to trade it traditionally.
Dark Cloud Cover Bearish Reversal Trade Setup
We can see the dark cloud cover pattern occurring on the Microsoft (MSFT) daily chart on February 11th, 2020.
The existing trend is bullish, as determined by the fifty-day moving average. The first day is an up candle bullish marubozu. The second day opens above the first candle’s high and is a black down candlestick.
With the signal set, traditional traders short at a break of the first candle’s low and set a stop loss above the first candle’s high.
In our Microsoft example, traders would have gone short the next day when the bearish candlestick moved past the previous day’s low. This pattern would have produced profits for these traditional traders, but on average, trading this pattern bearish would lose you money over time.
So how do we trade this pattern profitability using history as our guide?
Dark Cloud Cover Bullish Continuation Trade Setup
Does the Dark Cloud Cover Candlestick Pattern Work? (Backtest Results)
Using the following rules, I backtested the dark cloud cover pattern on the daily timeframe in the crypto, forex, and stock markets.
- A close above the 50-day SMA constitutes an uptrend.
- I tested risk-reward ranges from 1 to 5.
- The optimal risk-reward ratio is selected using profit per bar.
- Entry and exits are discussed in the how-to trade section above.
- Confirmation must occur within three days of the pattern signal.
Dark Cloud Cover Bearish Reversal Backtest Results
| crypto | forex | stock | |
|---|---|---|---|
| pattern_name | dark cloud cover | dark cloud cover | dark cloud cover |
| pattern_category | bearish reversal | bearish reversal | bearish reversal |
| pattern_bars | 2 | 2 | 2 |
| required_trend | uptrend | uptrend | uptrend |
| traded_as | bearish reversal | bearish reversal | bearish reversal |
| stop_bar_type | high | high | high |
| entry_bar_type | low | low | low |
| risk_reward | 4 | 4 | 2 |
| timeframe | 2015-2021 | 2010-2021 | 2000-2021 |
| bar_period | daily | daily | daily |
| total_tickers | 395 | 1351 | 6952 |
| pattern_tickers | 1 | 32 | 3834 |
| patterns | 2 | 71 | 31756 |
| trades | 2 | 53 | 24632 |
| confirm_perc | 1.0 | 0.75 | 0.78 |
| wins | 1 | 10 | 7767 |
| losses | 1 | 43 | 16865 |
| win_perc | 0.5 | 0.189 | 0.315 |
| trade_bars | 16 | 994 | 263347 |
| avg_trade_bars | 8.0 | 18.75 | 10.69 |
| avg_win_bars | 11.0 | 40.0 | 13.41 |
| avg_loss_bars | 5.0 | 13.81 | 9.44 |
| cons_wins | 1 | 1 | 10 |
| cons_losses | 0 | 3 | 16 |
| edge | 1.5 | -0.054 | -0.05 |
| crypto | forex | stock | |
|---|---|---|---|
| pattern_name | dark cloud cover | dark cloud cover | dark cloud cover |
| pattern_category | bearish reversal | bearish reversal | bearish reversal |
| pattern_bars | 2 | 2 | 2 |
| required_trend | uptrend | uptrend | uptrend |
| traded_as | bearish reversal | bearish reversal | bearish reversal |
| stop_bar_type | high | high | high |
| entry_bar_type | close | close | close |
| risk_reward | 5 | 5 | 2 |
| timeframe | 2015-2021 | 2010-2021 | 2000-2021 |
| bar_period | daily | daily | daily |
| total_tickers | 395 | 1351 | 6952 |
| pattern_tickers | 1 | 32 | 3834 |
| patterns | 2 | 71 | 31807 |
| trades | 2 | 70 | 28551 |
| confirm_perc | 1.0 | 0.99 | 0.9 |
| wins | 1 | 12 | 9564 |
| losses | 1 | 58 | 18987 |
| win_perc | 0.5 | 0.171 | 0.335 |
| trade_bars | 17 | 903 | 241756 |
| avg_trade_bars | 8.5 | 12.9 | 8.47 |
| avg_win_bars | 12.0 | 29.42 | 10.08 |
| avg_loss_bars | 5.0 | 9.48 | 7.65 |
| cons_wins | 1 | 2 | 12 |
| cons_losses | 0 | 3 | 14 |
| edge | 2.0 | 0.025 | 0.01 |
Dark Cloud Cover Bullish Continuation Backtest Results
| crypto | forex | stock | |
|---|---|---|---|
| pattern_name | dark cloud cover | dark cloud cover | dark cloud cover |
| pattern_category | bearish reversal | bearish reversal | bearish reversal |
| pattern_bars | 2 | 2 | 2 |
| required_trend | uptrend | uptrend | uptrend |
| traded_as | bullish continuation | bullish continuation | bullish continuation |
| stop_bar_type | low | low | low |
| entry_bar_type | high | high | high |
| risk_reward | 1 | 2 | 5 |
| timeframe | 2015-2021 | 2010-2021 | 2000-2021 |
| bar_period | daily | daily | daily |
| total_tickers | 395 | 1351 | 6952 |
| pattern_tickers | 1 | 32 | 3834 |
| patterns | 2 | 72 | 31607 |
| trades | 0 | 28 | 12378 |
| confirm_perc | 0.0 | 0.39 | 0.39 |
| wins | 0 | 12 | 2159 |
| losses | 0 | 16 | 10219 |
| win_perc | 0.0 | 0.429 | 0.174 |
| trade_bars | 0 | 204 | 165110 |
| avg_trade_bars | 0.0 | 7.29 | 13.34 |
| avg_win_bars | 0.0 | 13.92 | 32.18 |
| avg_loss_bars | 0.0 | 2.31 | 9.36 |
| cons_wins | 0 | 2 | 4 |
| cons_losses | 0 | 2 | 11 |
| edge | 0.0 | 0.288 | 0.04 |
| crypto | forex | stock | |
|---|---|---|---|
| pattern_name | dark cloud cover | dark cloud cover | dark cloud cover |
| pattern_category | bearish reversal | bearish reversal | bearish reversal |
| pattern_bars | 2 | 2 | 2 |
| required_trend | uptrend | uptrend | uptrend |
| traded_as | bullish continuation | bullish continuation | bullish continuation |
| stop_bar_type | low | low | low |
| entry_bar_type | close | close | close |
| risk_reward | 1 | 5 | 5 |
| timeframe | 2015-2021 | 2010-2021 | 2000-2021 |
| bar_period | daily | daily | daily |
| total_tickers | 395 | 1351 | 6952 |
| pattern_tickers | 1 | 32 | 3834 |
| patterns | 2 | 72 | 32153 |
| trades | 2 | 71 | 29710 |
| confirm_perc | 1.0 | 0.99 | 0.92 |
| wins | 0 | 17 | 6085 |
| losses | 2 | 54 | 23625 |
| win_perc | 0.0 | 0.239 | 0.205 |
| trade_bars | 3 | 274 | 70502 |
| avg_trade_bars | 1.5 | 3.86 | 2.37 |
| avg_win_bars | 0.0 | 6.47 | 3.89 |
| avg_loss_bars | 1.5 | 3.04 | 1.98 |
| cons_wins | 0 | 2 | 5 |
| cons_losses | 2 | 3 | 20 |
| edge | -1.0 | 0.435 | 0.225 |
Dark Cloud Cover Mean Reversion Backtest Results
| crypto | forex | stock | |
|---|---|---|---|
| pattern_name | dark cloud cover | dark cloud cover | dark cloud cover |
| pattern_category | bearish reversal | bearish reversal | bearish reversal |
| pattern_bars | 2 | 2 | 2 |
| required_trend | uptrend | uptrend | uptrend |
| traded_as | bullish mean reversion | bullish mean reversion | bullish mean reversion |
| stop_bar_type | atr | atr | atr |
| entry_bar_type | pattern_low | pattern_low | pattern_low |
| risk_reward | 1 | 1 | 3 |
| timeframe | 2015-2021 | 2010-2021 | 2000-2021 |
| bar_period | daily | daily | daily |
| total_tickers | 395 | 1351 | 6952 |
| pattern_tickers | 1 | 32 | 3834 |
| patterns | 2 | 72 | 31531 |
| trades | 1 | 30 | 16699 |
| confirm_perc | 0.5 | 0.42 | 0.53 |
| wins | 0 | 20 | 5303 |
| losses | 1 | 10 | 11396 |
| win_perc | 0.0 | 0.667 | 0.318 |
| trade_bars | 3 | 473 | 231069 |
| avg_trade_bars | 3.0 | 15.77 | 13.84 |
| avg_win_bars | 0.0 | 8.8 | 20.16 |
| avg_loss_bars | 3.0 | 29.7 | 10.89 |
| cons_wins | 0 | 2 | 8 |
| cons_losses | 1 | 1 | 12 |
| edge | -1.0 | 0.337 | 0.274 |
| crypto | forex | stock | |
|---|---|---|---|
| pattern_name | dark cloud cover | dark cloud cover | dark cloud cover |
| pattern_category | bearish reversal | bearish reversal | bearish reversal |
| pattern_bars | 2 | 2 | 2 |
| required_trend | uptrend | uptrend | uptrend |
| traded_as | bearish mean reversion | bearish mean reversion | bearish mean reversion |
| stop_bar_type | atr | atr | atr |
| entry_bar_type | pattern_high | pattern_high | pattern_high |
| risk_reward | 1 | 5 | 1 |
| timeframe | 2015-2021 | 2010-2021 | 2000-2021 |
| bar_period | daily | daily | daily |
| total_tickers | 395 | 1351 | 6952 |
| pattern_tickers | 1 | 32 | 3834 |
| patterns | 2 | 72 | 32044 |
| trades | 0 | 25 | 10650 |
| confirm_perc | 0.0 | 0.35 | 0.33 |
| wins | 0 | 5 | 5391 |
| losses | 0 | 20 | 5259 |
| win_perc | 0.0 | 0.2 | 0.506 |
| trade_bars | 0 | 284 | 53534 |
| avg_trade_bars | 0.0 | 11.36 | 5.03 |
| avg_win_bars | 0.0 | 23.2 | 5.02 |
| avg_loss_bars | 0.0 | 8.4 | 5.04 |
| cons_wins | 0 | 1 | 10 |
| cons_losses | 0 | 2 | 8 |
| edge | 0.0 | 0.2 | 0.016 |
The data demonstrates that going against traditional trading wisdom is often the right strategy. The dark cloud cover backtests results show that we’re looking for an upward price movement.
The Bottom Line
The Dark Cloud Cover’s large black candle forming isn’t an ominous warning to traders – according to history, this supposed price reversal pattern is simply a temporary retracement before prices continue their upward trend.
