The market continues the uptrend on the first day. By day two sellers take price down to close near the open of the previous day.
In FX, traders view the higher the second day high the better since the bigger the rally after the open, the more sellers were able to drive price back down.
This formation suggests short sellers have begun to take charge of the market, and longs have been shaken by the sudden lost of bullish momentum. Declining days are common after this formation as more short sellers confidently to enter the market with a clear stop benchmark at the second day high.
The deeper day-two closes into the first day candlestick body, the greater the chance of the uptrend topping out. If the second day candle does not trade below the midpoint of the first day body, traders typically feel it safer to wait for confirmation on the third day.
Some traders wait for confirmation regardless of how deep the Dark Cloud Cover penetrates the second day.
In non-FX markets, traders want to see the second day gap up, opening above the close of the previous day. Because the Forex Market offers continues 24 hour markets, such gaps are not typically possible. But FX traders will turn to the high of the second day to indicate how strong the opening rally is, to gauge the strength of the subsequent bear move.
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