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Dark-cloud cover pattern originates from the Japanese candlestick trading techniques. It is usually a bearish pattern and the trader should, therefore, interpret it as a good opportunity for buying put options whenever it is formed. However, there are rules that are normally clearly laid out on how to trade using this trading pattern.
Since this is a bearish pattern as stated above, it shows that the market prices at the expiration date ought to be lower than at the striking price; which is the reason to why the trader should buy put options.
The dark cloud cover pattern involves the formation of two types of candles, the first candle is bull candles and the next candles is a bear candle. Then these two candlesticks should form after a bullish trend. In actual sense, these two candles signal the end of the bullish trend. Therefore, the trader should buy a put option immediately the bearish candle closes. Then the trader should choose to use different expiration times from the various timeframes.
Dark Cloud Cover Must Follow a Bullish Trend
The trickiest thing about the dark-cloud cover pattern which is usually considered as a trap with most traders forgetting about it is that the dark-cloud cover pattern must always come after a bullish trend. If the trader is able to always have this in mind as he or she tries to identify this pattern, the trader will be able to avoid small corrections. In short, the dark-cloud cover pattern is the opposite of the piercing pattern. The dark cloud cover pattern is a bearish pattern while the piercing pattern is a bullish pattern.
Just as depicted at the start of this article, the dark-cloud cover is a bearish pattern meaning that the trader should always ensure that he or she trades put options. The trader should be sure that it really the dark-cloud cover pattern that has formed by looking at the previous trend to ensure that it was a bullish trend and then identifying whether the two candles have been formed.
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