Dark Cloud Cover Candlestick Pattern

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?

Dark Cloud Cover Candlestick Pattern Illustration

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

Dark Cloud Cover Candlestick Pattern Identification (AAPL)

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

Dark Cloud Cover Bearish Reversal Trade Setup (MSFT)

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

Dark Cloud Cover Bullish Continuation Trade Setup (NVDA)

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

cryptoforexstock
pattern_namedark cloud coverdark cloud coverdark cloud cover
pattern_categorybearish reversalbearish reversalbearish reversal
pattern_bars222
required_trenduptrenduptrenduptrend
traded_asbearish reversalbearish reversalbearish reversal
stop_bar_typehighhighhigh
entry_bar_typelowlowlow
risk_reward442
timeframe2015-20212010-20212000-2021
bar_perioddailydailydaily
total_tickers39513516952
pattern_tickers1323834
patterns27131756
trades25324632
confirm_perc1.00.750.78
wins1107767
losses14316865
win_perc0.50.1890.315
trade_bars16994263347
avg_trade_bars8.018.7510.69
avg_win_bars11.040.013.41
avg_loss_bars5.013.819.44
cons_wins1110
cons_losses0316
edge1.5-0.054-0.05
cryptoforexstock
pattern_namedark cloud coverdark cloud coverdark cloud cover
pattern_categorybearish reversalbearish reversalbearish reversal
pattern_bars222
required_trenduptrenduptrenduptrend
traded_asbearish reversalbearish reversalbearish reversal
stop_bar_typehighhighhigh
entry_bar_typeclosecloseclose
risk_reward552
timeframe2015-20212010-20212000-2021
bar_perioddailydailydaily
total_tickers39513516952
pattern_tickers1323834
patterns27131807
trades27028551
confirm_perc1.00.990.9
wins1129564
losses15818987
win_perc0.50.1710.335
trade_bars17903241756
avg_trade_bars8.512.98.47
avg_win_bars12.029.4210.08
avg_loss_bars5.09.487.65
cons_wins1212
cons_losses0314
edge2.00.0250.01

Dark Cloud Cover Bullish Continuation Backtest Results

cryptoforexstock
pattern_namedark cloud coverdark cloud coverdark cloud cover
pattern_categorybearish reversalbearish reversalbearish reversal
pattern_bars222
required_trenduptrenduptrenduptrend
traded_asbullish continuationbullish continuationbullish continuation
stop_bar_typelowlowlow
entry_bar_typehighhighhigh
risk_reward125
timeframe2015-20212010-20212000-2021
bar_perioddailydailydaily
total_tickers39513516952
pattern_tickers1323834
patterns27231607
trades02812378
confirm_perc0.00.390.39
wins0122159
losses01610219
win_perc0.00.4290.174
trade_bars0204165110
avg_trade_bars0.07.2913.34
avg_win_bars0.013.9232.18
avg_loss_bars0.02.319.36
cons_wins024
cons_losses0211
edge0.00.2880.04
cryptoforexstock
pattern_namedark cloud coverdark cloud coverdark cloud cover
pattern_categorybearish reversalbearish reversalbearish reversal
pattern_bars222
required_trenduptrenduptrenduptrend
traded_asbullish continuationbullish continuationbullish continuation
stop_bar_typelowlowlow
entry_bar_typeclosecloseclose
risk_reward155
timeframe2015-20212010-20212000-2021
bar_perioddailydailydaily
total_tickers39513516952
pattern_tickers1323834
patterns27232153
trades27129710
confirm_perc1.00.990.92
wins0176085
losses25423625
win_perc0.00.2390.205
trade_bars327470502
avg_trade_bars1.53.862.37
avg_win_bars0.06.473.89
avg_loss_bars1.53.041.98
cons_wins025
cons_losses2320
edge-1.00.4350.225

Dark Cloud Cover Mean  Reversion Backtest Results

cryptoforexstock
pattern_namedark cloud coverdark cloud coverdark cloud cover
pattern_categorybearish reversalbearish reversalbearish reversal
pattern_bars222
required_trenduptrenduptrenduptrend
traded_asbullish mean reversionbullish mean reversionbullish mean reversion
stop_bar_typeatratratr
entry_bar_typepattern_lowpattern_lowpattern_low
risk_reward113
timeframe2015-20212010-20212000-2021
bar_perioddailydailydaily
total_tickers39513516952
pattern_tickers1323834
patterns27231531
trades13016699
confirm_perc0.50.420.53
wins0205303
losses11011396
win_perc0.00.6670.318
trade_bars3473231069
avg_trade_bars3.015.7713.84
avg_win_bars0.08.820.16
avg_loss_bars3.029.710.89
cons_wins028
cons_losses1112
edge-1.00.3370.274
cryptoforexstock
pattern_namedark cloud coverdark cloud coverdark cloud cover
pattern_categorybearish reversalbearish reversalbearish reversal
pattern_bars222
required_trenduptrenduptrenduptrend
traded_asbearish mean reversionbearish mean reversionbearish mean reversion
stop_bar_typeatratratr
entry_bar_typepattern_highpattern_highpattern_high
risk_reward151
timeframe2015-20212010-20212000-2021
bar_perioddailydailydaily
total_tickers39513516952
pattern_tickers1323834
patterns27232044
trades02510650
confirm_perc0.00.350.33
wins055391
losses0205259
win_perc0.00.20.506
trade_bars028453534
avg_trade_bars0.011.365.03
avg_win_bars0.023.25.02
avg_loss_bars0.08.45.04
cons_wins0110
cons_losses028
edge0.00.20.016

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.

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