Piercing line and dark cloud cover: the 50% rule explained

The piercing line and dark cloud cover are two-candle reversal patterns built around a single measurement: how far the second candle pushes back into the first. A piercing line forms after a decline and closes above the midpoint of the previous bearish body. Dark cloud cover forms after a rally and closes below the midpoint of the previous bullish body. They sit between a weak harami and a full engulfing pattern on the scale of "how convincing was the takeover".

Piercing line

After a decline:

1. A long bearish candle.
2. A bullish candle that, in the classic definition, opens below the first candle's low (a gap down), then rallies and closes above the midpoint of the first candle's body, but not above its open.

The idea: sellers start the second period in full control, opening even lower, but buyers recover more than half of the previous period's losses. The piercing line glossary entry has a short version.

Dark cloud cover

After a rally, the mirror image:

1. A long bullish candle.
2. A bearish candle that opens above the first candle's high, then falls and closes below the midpoint of the first body, but not below its open.

A "dark cloud" over the previous gains. See also dark cloud cover in the glossary.

The 50% penetration rule

The midpoint is what separates these patterns from ordinary noise:

• If the second candle closes only a little into the first body, the pattern is weak and many traders ignore it.
• If it closes beyond the midpoint, it qualifies.
• If it closes beyond the first candle's open, covering the whole body, it is no longer a piercing line or dark cloud cover but an engulfing pattern.

Calculating the midpoint is simple: (open + close) / 2 of the first candle.

What happens without gaps

These patterns were described for stock markets, where an overnight gap at the open is routine. In forex, which trades continuously on weekdays, and in OTC series that tick around the clock, the second candle almost always opens at or next to the previous close. True gaps are rare outside weekend opens.

Without the gap, the pattern changes character. In the classic version, the second candle had to reverse a gap and then claw back half the previous body, which takes real force. In a continuous market it only needs to recover half of the previous body from where that body ended. That is a much more common event. Traders who use these patterns in forex usually accept the no-gap version but compensate by insisting on context: a clear level, a sustained move before it, and a decisive close past the midpoint.

A worked example

USD/CHF on M15 rallies for an hour to 0.88400, a level where it turned down twice this week. The last bullish candle opens 0.88250 and closes 0.88400. Its midpoint is 0.88325.

The next candle opens 0.88400, briefly pushes to 0.88420, then falls and closes at 0.88310. That is below the midpoint (0.88325) and above the first candle's open (0.88250). Dark cloud cover at resistance, in its no-gap form.

A trader would watch what follows. If the next candle closes below 0.88250, the bearish idea strengthens. If price recovers back above 0.88420, the high of the pattern, the cloud has blown over and the rally may continue.

A variation of the failure: the second candle closes at 0.88330, just above the midpoint. Technically not quite dark cloud cover. Rounding it to "close enough" is how people end up seeing patterns everywhere.

Reliability and false signals

• The patterns are weaker than engulfing patterns by definition, since the takeover is only partial.
• Without the gap, they appear far more often than in their original markets.
• In a strong trend, a deep pullback candle is frequently just a pullback.
• They need a preceding move. Two candles like this inside a range mean very little.

Short expiries and OTC

On S5–M1 charts, a candle recovering half of the previous one is so common that the pattern loses most of its meaning. For short expiries, many traders look for it on M5 or M15 at clear support and resistance levels.

On Sky Trade's OTC instruments, prices are generated by Sky Trade's server and do not follow any real market. The model makes the next move unpredictable, so these patterns there are coincidences between two random candles.

How to use it in the Sky Trade terminal

On the Candles chart, place a horizontal level at the first candle's midpoint as soon as it closes; then you can see at a glance whether the second candle crossed it. Judge only closed candles, using the candle timer.