we trade in FX is what istraded in all markets—sentiment. Fundamental factors shape and manufacture sentiment, while technical analysis expresses it. Price patterns aresimply the reflection of repetitive human reactions of fear and greed toever-changing news flow. They are not some randomly generated numbersfrom an Excel spreadsheet, even though they may look very similar. Thisis the critical flaw of pure randomness theorists—just because randomfunctions can often mimic price patterns does not mean that price patterns themselves are random.
CHAPTER 3
The Secretto Trading
H
ere is the secret to all trading.Ready?Prices will either trend or range. That’s all there is to it. Itreally is that simple but clearly not that easy. These two discrete properties of price require diametrically opposite mind-sets and money management techniques. Knowing when to apply each is what makes tradingso difficult. Fortunately, the FX market is uniquely suited to accommodate both styles, providing either trend or range traders with opportunities for profit. Since trend seems to be the more popular subject, let’sexamine it first.What is trend? The simplest definition of trend is higher lows in anuptrend and lower highs in a downtrend. Some traders define trend asprices remaining within an upward or downward sloping 20-period moving average. Yet others may draw trend lines or channels. I have my owndefinition, involving Bollinger bands, which I will discuss later in thebook, but regardless of how one defines trend, the goal of trend trading isthe same—join the move early and hold the position until the trend exhausts itself. The basic mind-set of the trend trader is “I am right or I amout,” and his governing philosophy boils down to this: Do today whathappened yesterday. The implied bet all trend traders make is that pricewill continue to follow its current direction. If it doesn’t, there is littlereason to hold on to the trade. Therefore, trend traders typically placevery tight stops and often make several forays into the market in order toestablish a proper entry.By nature, trend trading generates far more losing trades than winning29
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TECHNICAL ANALYSIS OF THE CURRENCY MARKET
trades and requires rigorous risk control in order to achieve profits. Theusual rule of thumb is that trend traders should never risk more than 1.5 to2.5 percent of their capital on any given trade. On a $10,000 account trading100,000-unit standard lots, that means stops as small as 15 to 25 pips behind the entry price. Clearly, in order to practice such a method, a tradermust be confident that the market being traded is highly liquid. Of coursethe currency market is not only the most liquid market in the world butalso the most fluid. Since the market trades 24 hours per day 5 days aweek, it eliminates much of the gap risk found in exchange-based markets.Certainly gaps occur in FX, but not nearly as frequently as they happen instock or bond markets, so slippage is far less of a problem.When trend traders are right about the trade the profits can be enormous. This dynamic is especially true in FX where high leverage greatlymagnifies the gains. It’s not unusual to see a currency trend trader doublehis money in a short period of time if he catches a strong move. Here is apossible scenario of how it can be done. A trader starts out with $10,000 inhis account. He uses a strict rule of 20-pip stops to limit his losses to 2 percent of capital. He may get stopped out five, six, or even ten times in arow, but if he finally catches a large move such as the 1,600-point declinein EUR/USD from January to July of 2005, his one-lot purchase would generate $16,000 in profit, easily increasing his account by 200 percent in amatter of months.Of course few traders have the discipline to take constant stoplosses. Most traders dejected by a series of bad trades tend to becomestubborn and fight the market, often placing no stops at all or removingthe ones already in place. This is the time when FX leverage can becomemost dangerous. The same process that quickly produces profits can alsogenerate massive losses. The end result is that many undisciplinedtraders suffer margin calls and lose most of their speculative capital onone or two bad trades.Trading trend with discipline can be extremely difficult because ifthe trader uses high leverage he leaves little room to be wrong. Tradingwith very tight stops can result in 10 or even 20 consecutive stop-outsbefore a trader can find a trade with enough momentum and directionality to succeed.For this reason many traders prefer to trade range-bound strategies.The typical process of range-bound trading involves isolating currenciesthat are trading in price channels and then selling at the top of the channeland buying at the bottom of the channel. This can be a very lucrative strategy, but in its essence it is still a trend-based idea, albeit one that anticipates an imminent countertrend. (What is a countertrend, after all, excepta trend going the other way?)True range traders don’t care about direction. The underlying assump-
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tion of range traders is that no matter which way the currency is travelingat present it will most likely return to its point of origin. Range traders adhere to the concept of reversion to the mean. In fact, range traders bet onthe possibility that prices will trade through the same levels over and overagain, and their goal is to harvest all those oscillations for profit.Clearly, range trading requires a completely different money management technique. Instead of looking for just the “right” entry, range tradersactually prefer to be wrong at the outset, so they can build a trading position. For example, imagine that EUR/USD is in an uptrend and currentlytrading at 1.3000 (see Figure 3.1). A range trader may decide to short thepair at that level and every 100 pips higher, and then buy a portion of thetrade back as it retraces every 100 pips down. His assumption is that eventually the pair will return to that original 1.3000 level. If EUR/USD indeedrises to 1.3500 and then turns back down to 1.3000, then the range traderwill have been able to garner a handsome profit, especially if the currencymoves back and forth in its climb to 1.3500 and its fall to 1.3000.However, as we can see from this example, a range-bound trader willneed to have very deep pockets in order to implement this strategy. Inrange trading, employing large leverage can be devastating, as positionscan often go against the trader for many points in a row and, if he is notcareful, trigger a margin call before the currency eventually turns.Fortunately, the FX market provides a flexible solution for this type oftrading. Most retail FX dealers offer mini lots of 10,000 units rather than
FIGURE 3.1 Hypothetical Range Trading Example
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TECHNICAL ANALYSIS OF THE CURRENCY MARKET
100,000 lots. For a pair like EUR/USD, in a 10,000-unit lot each individualpip is worth only $1 instead of $10 so the same hypothetical trader with a$10,000 account risking 2 percent per trade can have a stop-loss budget of200 pips instead of only 20 pips. Even better, many dealers allow customers to trade in units of 1,000 or even 100-unit increments. Under thatscenario our range trader trading 1,000-unit positions could withstand a2,000-pip drawdown (with each pip now worth only 10 cents) before triggering a stop-loss. This flexibility allows range traders plenty of room torun their strategies.Because FX dealers do not charge commissions and will quote thesame price regardless of whether a customer wants to deal for 100 unitsor 100,000 units, a range-trading strategy can be implemented with even asmall account of $1,000, as long as the trader properly sizes his trades.Granted, this method is the trading equivalent of collecting pennies andnickels, but it is the only proper way to implement a range strategy without assuming a large risk of blowout.
TRENDING CURRENCIESWhich currencies tend to trend more? That is, of course, an impossiblequestion. The obvious answer is that at any given time any pair can find itself in a trend or range environment. Still, as general rule of thumb, themajors and the commodity pairs tend to trend more since they directly express the big macroeconomic events of the day while the crosses (currency pairs that do not have USD in them) tend to be more range-bound.For a technically oriented trader, one of the great aspects of this market is that unlike the stock market, which contains thousands of equities,the FX market trades only four major pairs and three commodity pairs ofcurrencies. Certainly, there are many more currencies in the world thanthat, but these minor currencies, known as exotics, are not traded bymany retail dealers and often have extraordinarily wide bid/ask spreadsbecause of lack of liquidity. The vast majority of speculative capital in thecurrency market is concentrated in the following major pairs, and all retail FX dealers will make tight markets in these instruments.The Majors• EUR/USD• USD/JPY• GBP/USD• USD/CHF
Euro–U.S. dollarU.S. dollar–Japanese yenBritish pound–U.S. dollarU.S. dollar–Swiss franc
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It is certainly understandable why the United States, the EuropeanUnion, and Japan would have the most active and liquid currencies in theworld, but why the United Kingdom? After all, India has a larger gross domestic product (GDP) ($3.3 trillion vs. $1.7 trillion for the UK), while Russia’s GDP ($1.4 trillion) and Brazil’s GDP ($1.5 trillion) almost match theUnited Kingdom’s total economic production. The explanation, as with somuch of the FX market, is simply tradition. The United Kingdom was thefirst economy in the world to develop sophisticated capital markets, andat one time it was the British pound, not the U.S. dollar, that served as theworld’s reserve currency. Because of this legacy and because of London’sprimacy as the center of FX dealing in the world, the pound is consideredone of the major currencies of the world. However, because the UnitedKingdom’s economy is approximately one-tenth the size of those of theUnited States or European Union, liquidity in the pound can be a problem.That’s why the GBP/USD will often move several hundred points per dayas traders scramble to either cover or establish positions. For this reasonthe pound tends to be streakiest of the major pairs, which can be wonderful if you are on the right side of the trend and unbelievably painful if youare not.The Swiss franc takes its place among the four majors because ofSwitzerland’s famed neutrality, fiscal prudence, and long history of safety.At one time 40 percent of the “Swissie” was physically backed by gold,and to many traders in the FX market it is still known as “liquid gold.” Intimes of geopolitical turmoil or economic recessions, traders flock to theSwiss franc as a liquid safe haven for assets.The largest major pair—in fact, the most liquid financial instrumentin the world—is the EUR/USD. This pair turns over almost $1 trillion perday in volume as trading proceeds from Tokyo to London to New York.The two currencies represent the two largest economic entities in theworld—the United States with an annual GDP of $11 trillion and theeuro zone with GDP of approximately $10.5 trillion. Although in recentyears U.S. economic growth has been far better than the euro zone’s, theeuro-zone economy generates net trade surpluses while the UnitedStates runs chronic trade deficits. The superior balance sheet position ofthe euro zone and the sheer size of the euro-zone economy have madethe euro an attractive alternative reserve currency to the dollar. Manycentral banks of the world, including those of China, Russia, Brazil, andSouth Korea, have diversified some of their reserves into the euro.Clearly this process takes time and it highlights one of the key attributesof successful trend trading—the need for a much longer-term outlook.Take a look at Figures 3.2 and 3.3, two charts using a three simple moving average (3 SMA) filter.
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TECHNICAL ANALYSIS OF THE CURRENCY MARKET
FIGURE 3.2 EUR/USD Daily PerspectiveSource: FXtrek IntelliChart™. Copyright 2001–2005 FXtrek.com, Inc.
FIGURE 3.3 EUR/USD Monthly PerspectiveSource: FXtrek IntelliChart™. Copyright 2001–2005 FXtrek.com, Inc.
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The 3 SMA filter is a good way to gauge the strength of trend. The basic premise of this filter is that if the short-term trend (7 SMA), the intermediate-term trend (20 SMA), and the long-term trend (65 SMA) are allaligned in one direction, then the trend is strong. The importance of the 3SMA filter does not lie in the specific SMA values, but rather in the interplay of the short-/intermediate-/long-term price trends as demonstrated bythe three simple moving averages. As long as you use reasonable proxiesfor the short-, intermediate-, and long-term trends, the 3 SMA filter willprovide valuable analysis.Looking at the EUR/USD from two time perspectives, we can see howdifferent the trend signals can be. Figure 3.2 displays the daily price actionfor the summer months of 2005, which shows choppy movement with aclear bearish bias. Figure 3.3, however, uses the monthly data for the pastfive years and paints a very different picture. According to Figure 3.3,EUR/USD has been in a clear up trend despite some very sharp corrections along the way.Warren Buffett, the famous investor who is well known for makinglong-term trend trades, has been heavily criticized for holding on to hismassive long EUR/USD position, which has recently suffered some losses.Looking at Figure 3.3, which offers a much longer time perspective, it becomes much clearer why Mr. Buffett often has the last laugh in the financial markets.The Commodity Currencies• USD/CADU.S. dollar–Canadian dollar• AUD/USDAustralian dollar–U.S. dollar• NZD/USDNew Zealand dollar–U.S. dollarThe three most liquid commodity currencies in FX markets areUSD/CAD, AUD/USD, and NZD/USD. The Canadian dollar is affectionatelyknown as the “loonie,” the Australian dollar as the “Aussie,” and the NewZealand dollar as the “kiwi.” These three nations are tremendous exportersof commodities and often trend very strongly in concert with demand fortheir primary export product. Figure 3.4 shows the performance of theCanadian dollar and crude oil prices. Canada is the largest exporter of oil tothe United States, with almost 10 percent of its GDP comprised of the energy exploration sector. Because USD/CAD trades inversely (it falls as CADgoes up in value), Canadian dollar strength creates a downtrend in the pair.Although Australia does not have many oil reserves, the country is avery rich source of precious metals and iron ore and is also the secondlargest exporter of gold in the world. In Figure 3.5 note how a rally in goldfrom December 2002 to November 2004 coincided with a very strong upmove in the Australian dollar.
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TECHNICAL ANALYSIS OF THE CURRENCY MARKET
FIGURE 3.4 USD/CAD versus OilSource: FXtrek IntelliChart™. Copyright 2001–2005 FXtrek.com, Inc.
FIGURE 3.5 AUD/USD versus GoldSource: FXtrek IntelliChart™. Copyright 2001–2005 FXtrek.com, Inc.
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CROSSES ARE TYPICALLY BEST FOR RANGE TRADINGIn contrast to the majors and commodity block currencies, which can offer traders some of the strongest and longest trending opportunities, currency crosses often present the best range-bound trades. Crosses aresimply combinations of majors and commodity currencies that do nothave the U.S. dollar as part of the pairing. There are more than 18 combinations of major and commodity crosses, but some of the most activelytraded include the following pairs:• EUR/JPY—one of the most active pairings in the currency world, as itis the primary hedging instrument for the massive amount of trade between Europe and Asia.• GBP/JPY—a very active cross among carry trade speculators becauseof the wide interest rate differentials that have developed between theUK and Japan since the beginning of the millennium.• AUD/JPY—yet another widely traded carry-based cross that often attracts flows from Japanese pensioners seeking income from muchhigher-yielding Australian bonds.• EUR/GBP—a very active cross that reflects trade flows and economicperformance disparities between the UK and the euro zone.• EUR/CHF—a more muted cross that often trades on economic andpolitical differentials between the two regions.• CAD/JPY—one of the purest ways to express an opinion on oil in thecurrency market, as Canada is the primary beneficiary of high oilprices in the industrialized world while Japan is the greatest victim.The EUR/CHF is perhaps the best range-bound pair to trade at thepresent time. The key reason for such tight trading is that there is very little difference between the growth rates of Switzerland and the EuropeanUnion. Both regions run current account surpluses and adhere to fiscallyconservative policies. Furthermore, as Switzerland’s largest trading partner and biggest export market, the euro zone and its economic fate greatlyimpact Switzerland’s economy.One strategy for range traders is to determine the parameters of therange for the pair, divide them by a median line, and simply buy below themedian and sell above it. For example, in EUR/CHF, range traders could establish 1.5600 as the top and 1.5280 as the bottom of the range with 1.5440as the median line demarcating the buy and sell zones (see Figure 3.6).Range traders are agnostic about direction. They simply want to sell relatively overbought conditions and buy relatively oversold conditions. Oneof the reasons that cross currencies are so attractive for this strategy is because imbalances between culturally and economically similar countries
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TECHNICAL ANALYSIS OF THE CURRENCY MARKET
FIGURE 3.6 EUR/CHF: Example of Narrow RangeSource: FXtrek IntelliChart™. Copyright 2001–2005 FXtrek.com, Inc.
tend to return to equilibrium. The same cannot be said for stocks. It is hardto fathom that Switzerland would go into a depression while the rest of Europe merrily expands. In contrast, it is quite easy to imagine that while General Motors may file for bankruptcy Daimler Chrysler would continue to dobusiness. Because currencies represent macroeconomics, they are notnearly as susceptible to microeconomic risk as individual company stocksand are therefore much safer to range trade.Nevertheless, risk is present in all speculation, and traders should neverrange trade any pair without a stop. A reasonable strategy is to employ a stopat one-half the amplitude of the total range. In the case of EUR/CHF, thestops would be at 160 pips above the high and 160 below the low. In otherwords, if this pair reached 1.5800 or 1.4800 the trader should stop himself outof the trade because range would most likely have been broken.
INTEREST RATES—THE FINAL PIECE OF THE PUZZLEWhile EUR/CHF can have a relatively tight 320-pip range, a pair likeGBP/JPY has seen a far larger 3,000-pip range (see Figure 3.7). What is thedifference? Interest rates.
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The Secret to Trading
FIGURE 3.7 GBP/JPY: Example of Wide RangeSource: FXtrek IntelliChart™. Copyright 2001–2005 FXtrek.com, Inc.
At the time of writing in August 2005, Switzerland had an interest rateof 75 basis points and euro-zone rates were 200 basis points, creating adifferential of only 125 basis points. The interest rates in the United Kingdom, however, stood at 475 basis points, while in Japan—which was stillmired in deflation—rates remained at 0 basis points for a whopping 475basis-point differential. The rule of thumb in FX is the larger the interestrate differential the more volatile the pair.Table 3.1 lists various crosses, their interest rate differentials, and themaximum pip movement from high to low over the past 12 months.TABLE 3.1 Range Values versus Interest Rate DifferentialsCurrencyPair
Central Bank Ratesas of 10/01/2005(Basis Points)
AUD/JPYGBP/JPYGBP/CHFUSD/JPYEUR/JPYEUR/CHFCHF/JPY
AUD-550 JPY-0GBP-450 JPY-0GBP-450 CHF-75USD-375 JPY-0EUR-200 JPY-0EUR-200 CHF-75CHF-75 JPY-0
Interest RateSpread(Basis Points)
12-MonthTradingRange in Pips
550450350425225125100
1,4002,1001,5001,9001,300350800
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TECHNICAL ANALYSIS OF THE CURRENCY MARKET
While the relationship is far from perfect, it is certainly substantial.Note how pairs with wider interest rate spreads typically trade in largerranges. Thus, when contemplating range-trading strategies in FX, tradersmust be keenly aware of rate differentials and adjust for volatility accordingly. Failure to take interest rate differentials into account could turn potentially profitable range-trading ideas into losing propositions. The FXmarket is incredibly flexible in its ability to accommodate both trend andrange traders, but proper knowledge is key to successful implementationof either range-trading or trend-trading strategies.
CHAPTER 4
Show Methe Data!
T
here are three basic ways to display price data in a chart. The simplest and perhaps least useful is via a line chart. The line chart displays one single point of price per unit of time and therefore offersonly the most basic data to the trader. Figure 4.1 is an example of a linechart in the EUR/USD using the daily time frame. Notice how the chart offers only the most basic data regarding price action, hiding all of the intraday volatility. Because of this property, few technical traders ever use linecharts as their source of analysis, yet perhaps more should. It is preciselybecause of their simplicity that line charts could be a valuable tool forquickly ascertaining trend or trend exhaustion. By eliminating most of theprice action, line charts also in effect eliminate a lot visual noise, allowingthe trader to focus on the core price movement.Bar charts are the next way to display price, and they encompass farmore information than simple line charts. Bar charts show the open, high,low, and close of the instrument for a particular time frame. Figure 4.2 depicts the basic visual parameters of the bar chart.Bar charts undoubtedly contain more data than the simple linecharts. Most importantly, they show the highs and lows for the given timeperiod, providing the trader with a clear idea of the magnitude of volatility. Note, for example, the same price data displayed as a bar chart andgreater depth of information that it conveys. Most importantly, the barchart offers the trader clues to the power of the move. See how in Figure4.3 a close near the top of the day’s range hints at further upside momentum to come.The final type of chart has become the most popular way to display41
FIGURE 4.1 EUR/USD Line ChartSource: FXtrek IntelliChart™. Copyright 2001–2005 FXtrek.com, Inc.
High
Close—alwaysmarked on the rightside of the bar
Open—alwaysmarked on the leftside of the bar
Low
FIGURE 4.2 Bar Chart Basics
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FIGURE 4.3 EUR/USD Bar ChartSource: FXtrek IntelliChart™. Copyright 2001–2005 FXtrek.com, Inc.
price data today. Candlestick charts, first invented by rice traders in 17thcentury Japan, come with their own lore. Legend has it that a 17th-centuryrice farmer used candlestick analysis to make 70 consecutive profitabletrades. Because of candlesticks’ exotic heritage and their incredible ability to produce descriptive images of price action in a highly compressedmanner, candlestick adherents attribute near mystical powers when describing this tool’s ability to predict price.Candlesticks were first popularized in the West by Steve Nisson, whohas written several authoritative books on the subject. For those truly interested in the subject matter, I suggest you refer to his work. For our purposes, however, only a basic understanding of candlesticks is necessary.Unlike many candlestick proponents, I find them almost useless for trading as a stand-alone instrument and valuable only when used in conjunction with other technical indicators. Nevertheless, like almost all othertraders in FX, I use them exclusively on my charts for several reasons, notthe least of which is the fact that they are far more aesthetically pleasingthan line or bar charts and they do provide a very powerful visual shorthand for price action.
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TECHNICAL ANALYSIS OF THE CURRENCY MARKET
HighOpenNote:In a bearish candle theopen is always above theclose.
CloseLow
FIGURE 4.4 Bearish Candle
How is a candlestick constructed? The basic parameters of the candlestick include a body circumscribed by the open and the close and twowicks or shadows that demarcate the high and the low. If the close islower than the open, then the candle is dark or bearish (see Figure 4.4). Ifthe open is higher than the close, then the candle is white or bullish (seeFigure 4.5).There are numerous candlestick formations, but all of them essentially fall into three categories:1. Breakout patterns2. Indecision patterns3. Reversal patterns
High
Close
OpenLow
FIGURE 4.5 Bullish Candle
Note:In a bullish candle theclose is always above theopen.
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Show Me the Data!
BREAKOUT PATTERNSBullish/Bearish EngulfingThe bullish engulfing pattern consists of two candlesticks; the first is black,and the second is a white candle that completely “engulfs” the first candle.The size and positioning of the white candlestick can vary greatly, but thecritical feature of the pattern is that the second candle should be long andits body should completely encompass the wicks or shadows as well as thebody of the smaller candle. The bigger the candle, the more bullish the signal. The bearish engulfing pattern works the exact same way except in reverse. Figures 4.6 and 4.7 show both bullish and bearish engulfing patterns.
Bullish engulfing pattern:Prices take out the priorperiod low and thensignificantly exceed the priorhighs, ending near the top ofthe range.
FIGURE 4.6 Bullish Engulﬁng Pattern
Bearish engulfing pattern:Prices take out the priorperiod high and thensignificantly exceed the priorlows, ending near the bottomof the range.
FIGURE 4.7 Bearish Engulﬁng Pattern
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TECHNICAL ANALYSIS OF THE CURRENCY MARKET
FIGURE 4.8 Bearish and Bullish Engulﬁng Patterns in USD/JPYSource: FXtrek IntelliChart™. Copyright 2001–2005 FXtrek.com, Inc.
The bullish or bearish engulfing candlestick formation is consideredby some to be a reversal pattern, but is in fact a very strong indication of apotential breakout or breakdown. Figure 4.8 shows both bullish and bearish engulfing formations, and as you can see the pattern occurs when bullsquickly sweep up all the outstanding offers or the bears hit every singlebid. The underlying logic behind the pattern is that early smart money ispositioning for a large directional move, and technically oriented traderswould be wise to follow.
INDECISION PATTERNSDoji CandleA doji candle is characterized by a very small or almost nonexistent bodyand either long or short shadows. There are numerous varieties of dojis,with some examples found in Figures 4.9 through 4.13, but they all connoteindecision on the part of the market. The basic dynamic of the doji is thatbuyers and sellers find themselves in an equilibrium as prices close at ornear where they open after they explore the highs and lows of the range.
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A simple doji candle,which displays amuted range and aclose equal to theopen.
A long-legged doji candle, whichshows a wide-ranging day withboth bulls and bears at astandstill by the end of theperiod.
FIGURE 4.9 Doji Candle
FIGURE 4.10 Long-Legged Doji
Two versions of the gravestone doji, which can oftenhalt rallies dead in their tracks as it connotes that pricesrose and then retraced all of their gains by returning totheir open.
FIGURE 4.11 Gravestone Doji
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TECHNICAL ANALYSIS OF THE CURRENCY MARKET
The dragonfly doji is a rare formation, but when ithappens it often presages a turnaround in prices as itshows that prices dipped but then recovered toopening levels.
FIGURE 4.12 Dragonﬂy Doji
FIGURE 4.13 Series of Dojis in USD/JPYSource: FXtrek IntelliChart™. Copyright 2001–2005 FXtrek.com, Inc.
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Dark Cloud CoverYet another indecision pattern is the Dark Cloud Cover (see Figure 4.14).The Dark Cloud Cover is a two-candle pattern that occurs when a longwhite candle is followed by a black candle with an open above the previous candle’s high but a close within the white candle’s body and below itsmidpoint. Dark Cloud Cover is somewhat similar to a bearish engulfing,and many traders consider the pattern to be more of a reverse rather thana hesitation or indecision pattern; but in fact the Dark Cloud Cover by itself is not strong enough to be considered a reversal pattern. Tradersshould wait to see price action confirm the reversal before assuming thatprices will change direction. Figure 4.15 shows the Dark Cloud Cover pattern in GBP/USD.The key dynamic in price action behind the Dark Cloud Cover is thatbulls, having taken prices to a new high, are unable to sustain their momentum and prices fall below the midpoint of the prior day’s range.Though some interpret this price action as a serious sign of weakness, Ithink a more fair explanation is a pause in momentum. Therefore this pattern should be viewed as one of market indecision rather than necessarilya precursor to a price turn.
Dark Cloud Cover patternis distinctly bearish asprices first make newhighs but end up closingbelow the middle of priorcandle’s range.
FIG