Elevate your trading game with Piercing Pattern and Dark Cloud Cover. Learn to spot trend reversals and maximize gains.
The Piercing Pattern and the Dark Cloud Cover are the two trading patterns we shall explore in this article. In particular, we will go into more depth on their formation and their trading guidelines.
How do the patterns form?
The Piercing Pattern and Dark Cloud Cover are reversal candlestick patterns that foretell a correction or reversal of the current trade. These patterns are both made up of two candlesticks, and they are mirror images of each another.
The Piercing Pattern, which develops near the chart's lows, foretells an upward reversal. At the peaks, the Dark Cloud Cover signals the start of a downward reversal.
In a figurative sense, the emergence of the Dark Cloud Cover in an uptrend indicates that the bulls are stymied by a significant barrier, and should they be unable to get beyond it, a downward correction is imminent.
Similarly, if the Piercing Pattern prints on the chart following a downtrend, the bears are losing control and the bulls feel confident about a coming uptrend.
Dark Cloud Cover
Japanese traders claim that there is limited potential for more expansion when this chart pattern prints on a chart. Two candlesticks—one white and one black—make up this pattern.
The market is expanding rapidly at the white candlestick, and a new local high is established. The following trading session begins with a gap higher due to the buyers' pressure and optimism.
But then the market declines and the black candlestick closes in the center of the white candlestick's body or even lower.
As a result, the black candlestick completely destroys the bulls' optimism, which was indicated by the white candlestick. The bears have recovered, stopped the bulls, and are prepared to counterattack.
The strength of this signal is measured by how far the black candlestick's closing price falls below the preceding white candlestick. Growth of the price above the pattern's high can nullify the signal.
Piercing Pattern
This pattern appears at market lows during a downtrend, which is quite the opposite of the Dark Cloud Cover. White and black candlesticks also form this pattern.
A powerful black candlestick develops in a downtrend, renewing local lows. During the following trading session, and driven by sells, the market opens with a gap downwards.
It then begins to rebound and closes with a powerful white candlestick in the middle of the body of the black candlestick or higher.
Thereafter, the bulls prepare to attack after the bears fail to defend the recent lows, which leads to a potential pullback or a trend reversal.
The strength of this buy signal depends on how high the white candlestick's body closes.
When this pattern prints on the chart, the price crossing over the white candlestick's high signals us to buy. If the prices drop below the pattern's low point, the signal can be canceled.
Trading by the patterns
These patterns ought to be looked for at chart highs and lows as they are reversal patterns. The Dark Cloud Cover and the Piercing pattern can be used in flats as well, provided they form at the bounce off the borders of the local range.
We recommend trading longer timeframes i.e. H4 or higher. Currency pairs, equities, futures and almost all other liquid patterns can be traded using these patterns.
Piercing Pattern: buying
At the chart's lows, a reversal candlestick Piercing Pattern prints during a downtrend.
Open a buying position once the white candlestick has confidently closed and the prices have risen beyond its high.
Set your stop loss a little beneath the pattern's low. Fibonacci correction lines or significant resistance levels are recommended places to take your profit.
Dark Clouds Cover: selling
At the chart's highs, a reversal candlestick pattern known as the Dark Clouds Cover prints during an uptrend.
Open a selling trade when the pattern is complete and the prices fall below the low of the black candlestick.
Set a stop loss above the pattern's peak. At crucial support levels or Fibonacci lines, take your profit.
Trading advice
Whenever you trade using these patterns, bear the following in mind:
In the stock or futures markets, the second candlestick must open with a gap above/below the closing price (depending on the pattern) or above/below the high/low of the preceding candlestick.
As Forex operates round the clock, gaps are uncommon, making it possible to use these patterns without them.
A strong signal is given if the second candlestick's body confidently covers more than half of the first one. The signal is considered weak if it only covers half of the body.
These patterns can be used to trade bounces off the range's borders in a flat.
Seeking confluence from technical analysis and indicators will strengthen the signals of the patterns.
Closing thoughts
In an uptrend or a downtrend, the Dark Cloud Cover and Piercing Pattern form, respectively. They foretell that the current trend will reverse.
Technical analysis and indicators can be used to complement trading using these patterns. This type of trading is covered in more detail in "Beyond Candlesticks: New Japanese Charting Techniques Revealed" by Steve Nison.
About Gamma Delta Fund
Find out more about how to get started here
Want to learn more about forex trading? Start with our recommended broker.
Ready to invest? Begin the onboarding process
תגובות