Basics of a Dark Cloud Cover pattern you should consider in your Forex training

When covering reversal patterns in your FOREX TRADING COURSE, you should come across a significant pattern – the dark cloud cover. In this article we are going to cover the basics of the dark cloud cover's architecture and elements you should consider in your on-going FOREX TRAINING or indeed live trading.

The dark cloud cover is a two candle pattern that qualifies as a reversal signal. It is a top reversal which means that the pattern is valid when it forms at a top of a market up-trend. Its formation is very simple. The first candle (out of the two) is usually a strong white candle. This means that the open is near its lows and the close is near its highs. The second candle is a strong black candle with an open above the first candle's high i.e. above its top shadow. The close however, needs to be deep into the first white candle's real body. That is, it has to penetrate as close to the prior candle's open as possible. The more it penetrates (the lower it closes) the more significant the pattern becomes. Some Forex trading courses may actually teach you to not take notice of this pattern unless the black candle penetrates more tha
50% into the white candle's real body. How you interpret this is up to you but if you decide to use this rule in your Forex training make sure that you look for a more more bearish confirmation that appears after the initial dark cloud cover pattern.

An exception to the rule of the black candle's open being above the prior white candle's high is also used by some Forex traders. When the black candle's open is above the prior candle's close it is also considered a dark cloud cover pattern by some. Again, if you decide to use this rule in your Forex training then do so, but make sure you reference your indicators and the overall market condition to confirm this is a rule you are willing to use in your Forex trading.

In order to fully understand this pattern its rationale could be useful to consider. As the market is trending upwards the first white candle appears, telling us that the bulls are strong. In the next session, the same market 'feeling' continues with a gap where the second session opens. However, the market 'feeling' totally changes and the technical analysis forms a new angle as the market closes well into the the prior white candle's real body, cancelling out all the gains received in the previous session. This is where we need to 'think outside of the box' and realise that if such massive gains can be cancelled by a single session the market must be telling us something. Indeed it is – it is telling us that the bears are starting to take control as demand is falling. At this point people going long (buyers) are starting to re-think their strategy and those waiting to go short (sellers) now have a potential contender for placing a stop-loss near the black candle's new high. Please note that quickly adapting to the market is something you must attain if you wish to be a successful Forex trader. Always look out for what the market is telling you, even if you think you are 100% right. The market has tendencies to change its mind without prior warning.