“What Makes the Dark Cloud Cover a Powerful Reversal Pattern?”

How to Trade the Dark Cloud Cover Reversal Setup

The Dark Cloud Cover is a powerful two-candle reversal pattern that signals weakness after a bullish run. When combined with confluence factors like resistance zones and EMAs, it can provide a high-probability short setup with defined risk and reward.

Step 1 – Identify Market Context

Timeframe: Daily

Trend: Market has been in a strong uptrend for several sessions.

Focus: Looking for a potential reversal signal at resistance.

Step 2 – Mark Levels

• Draw horizontal resistance from prior swing highs.
• Notice EMA 21 acting as dynamic resistance.
• Price rallies into this confluence zone → area of interest.

Step 3 – Wait for Signal

• Candle A: Large bullish candle closing near resistance.
• Candle B: Opens above Candle A’s high but closes below 50% of Candle A’s body.
• This formation = textbook Dark Cloud Cover reversal pattern.

Step 4 – Entry & Stop-Loss

• Entry: Place a sell limit order at 50% retracement of Candle B.
• Stop-loss: A few pips above Candle B’s high (the rejection level).

Step 5 – Target Setting

• TP1: Nearest support zone or EMA 89.
• TP2: Major swing support for 2:1 or 3:1 R:R potential.
• Trade management: If TP1 is hit, move stop-loss to breakeven.

Step 6 – Confirmation & Confluence

• ✅ Static resistance (horizontal level)
• ✅ Dynamic resistance (EMA 21)
• ✅ Strong reversal signal (Dark Cloud Cover)
• ✅ Attractive reward-to-risk potential

📝 Trade Recap Example

Market: EUR/USD Daily

Setup: Dark Cloud at resistance + EMA confluence

Entry: 1.1050 (50% retrace of bearish candle)

Stop-loss: 1.1100 (above rejection high)

Target 1: 1.0950 (support zone) → R:R ≈ 2:1

Target 2: 1.0850 (major swing low) → R:R ≈ 4:1

Result: High-probability short trade with defined risk, rule-based entry, and clear exit plan.

Key Takeaways

• The Dark Cloud Cover is a reliable reversal pattern on higher timeframes.
• It works best at resistance zones combined with EMA confluence.
• Entry via 50% retracement of Candle B improves R:R.
• Always set stop-loss above rejection highs to protect capital.

---

SEBI Disclaimer: The information provided in this post is for informational purposes only and should not be construed as investment advice. Readers must perform their own due diligence and consult a registered investment advisor before making any investment decisions. The views expressed are general in nature and may not suit individual investment objectives or financial situations.

Written by Indian-Share-Tips.com, which is a SEBI Registered Advisory Services