Dark Cloud Cover

The dark cloud cover is formed by the combination of two candles. The first candle must be open and green followed by a solid red candle the next day. The second candle must gap up from yesterday’s close and then drop past the middle of yesterday’s green candle. This is a common and very reliable candlestick pattern.

Dark cloud cover regularly signals a reversal in the trend of the share when it is seen. In the market the second day’s candle completely ignores the fact that the share was rising yesterday and reverses the trend. The share gaps higher when the market opens and then heavy selling drives the share price back down to create the second candle.

Bearish Engulfing Pattern

The bearish engulfing pattern is formed by two candles. The first is an open green candle. The price then gaps higher to open above yesterday’s close. The second candle is solid and red and closes below yesterday’s open. Only the main body is important in this pattern, both upper and lower shadows are ignored. In the market this pattern indicates a complete reversal in trend.

Sellers have stepped in and sold the share off to close below where it started the previous day. This is an indication of a major shift in sentiment in the market and is a very reliable pattern when seen. For those using bar charts this pattern is referred to as an outside day.

Confirmation

The same rules apply to selling as to buying. All the patterns discussed indicate a possible trend reversal and confirmation of a change in trend should be found before buying or selling shares. In the case of seeing a shooting star after a strong rise a conditional buy order can be placed below the shooting star.

This means you will buy the share if it falls the next day. A more conservative strategy is to wait for the next candle to confirm the change in trend before placing a sell order. Be aware that a candlestick pattern in an uptrend does not always mean that the share is going down. It can often mean the share is going to rest for a few days or weeks before it continues to rise.

To confirm a change in trend consider the volume traded on the day of the candlestick pattern. If large volume has been traded it is more likely that the pattern will be significant, than if only a few shares are traded on that day. Candlestick patterns can often occur at support or resistance or near a trend line or channel line. These tools can be used to confirm the significance of a candle.

Finally the clearer the pattern the more likely it is that the share will reverse. If it is difficult to see the pattern or distinguish the validity of a pattern then it is far less likely to indicate a reversal than a pattern that is very clear and obvious.

Jeff Cartridge
LearnCFDs.com

28 January 2009

Bookmark this page

Delicious Digg Facebook Google Bookmarks Stumbleupon Yahoo My Web Reddit Furl

Source: http://www.learncfds.com

Disclaimer: Trading Contracts for Difference carry risk where you can lose more than what you start with. View our full disclaimer here.

 ↑ Back to Top