Morning & Evening Stars

Let's consider a strong trend on your trading chart. The prices are rising or falling, and they appear to be on an indefinite trend, which makes you feel confident in the direction of the trend. Then, three candles appear that look different.

They disrupt the pattern and signify a potential turning point. Many traders miss this, or treat it as noise; however, these minor patterns can foreshadow the ending of a trend well before the market gives you any indications.

Welcome to the fascinating world of Morning Star and Evening Star patterns - two powerful indicators of changing trends in technical analysis. Whether you are new to trading and have not experienced this phenomenon, or you are an experienced trader with plenty of examples, understanding these patterns is part of what you need to build your understanding of and be able to forecast possible price movements, and make entries into trades.

What Are Morning and Evening Star Patterns?

The three candle reversal patterns, known as the Morning Star and Evening Star patterns, are generally one of the ways to refer to these formations in the candlestick analysis.

• A Morning Star candle pattern appears at the bottom of a downtrend and can indicate the beginning of a bullish reversal.

• An Evening Star candle pattern appears at the top of an uptrend and can indicate a bearish reversal.

There are the shapes of the candles associated with the patterns, but what is very crucial to the truth behind these patterns is the psychology of the market.

Anatomy of a Morning Star Pattern

At its most basic, the Morning Star suggests that we have an evolving narrative where buyers are increasingly taking control from sellers. Three candles make up the pattern:

1. First Candle: A long bearish candle illustrating aggressive selling. Second Candle: Small-bodied candle (bullish/bearish/Doji) observing indecision.

3. Third Candle: Large bullish candle, closing well into the body of the first candle, confirming strength from buyers.

This combination is when sentiment goes from bearish to bullish.

Anatomy of an Evening Star Pattern

The Evening Star works in reverse, indicating to traders that they should be ready for a bearish reversal. This pattern also incorporates three candles:

1. First Candle: Strong bullish candle showing upward thrust.

2. Second Candle: Shows a small-bodied candle showing indecision or exhaustion from buyers.

3. Third Candle: Large bearish candle that closes deep into the first candle, indicating the sellers have regained control.

Market psychology behind the patterns

We need to understand the meaning behind the patterns rather than just the shapes. The Morning Star is an example of moving market sentiment from fear to optimism: the sellers have been the dominant side initially, but buyers have slowly moved sentiment back in their favor.

The Evening Star is an example of market sentiment shifting from greed to caution: buyers have been in control by raising prices, but as hesitation sets in, sellers ultimately regain control and pressure prices back down.

How to identify Morning & Evening Stars

Keep in mind these basic rules when identifying the morning & evening stars:

• visible trend: Morning stars in downtrends, Evening stars in uptrends.

• Second candle must have a small body to signify indecision.

• The third candle must confirm the reversal by closing well into the body of the creation candle.- Patterns come into play more reliably when it is formed at a key support or resistance level.

How to Trade Morning & Evening Star

Step 1: Wait for Confirmation

Don't trade off the three candles alone. Wait for the next candle to close in the opposite direction of the candle, to confirm that a reversal occurred.

Step 2: Overlay Indicators

Use indicators to back up your analysis.

- RSI: identifies overbought or oversold markets.

- MACD: affirms a change in momentum.

- Volume: If volume spikes during the third candle, then that indicates additional reliability of the pattern.

Step 3: Determine Entry and Exit Levels

- Enter long trades off of morning stars after you get confirmation.

- Short positions work off evening stars until the next candle closes bearish.

- You can place a stop-loss just outside the pattern; it allows for risk, but does not allow for a lot of risk.

Advanced Tips

a) Change Timeframes

Morning and Evening Stars are more reliable on daily and weekly charts than on lower timeframes that are subject to more noise, which can create false signals.

b) Watch for Clusters

When a morning or evening star co-occurs with a key support or resistance level or fib retracement, they are exponentially more powerful when they cluster together.

c) Breakouts

If the reversal pattern occurs at a broken downtrend, this indicates a valid breakout or breakdown.

Trading Without Context

1. Patterns become less reliable in sideways markets

2. Not Waiting for Confirmation

You can lose a trade when you enter too early and the reversal doesn't happen.

3. Over-reliance on just the pattern itself

You should always be using candlestick patterns with other technical measures.

4. Not Using Risk Management Systems

The best reversal setups can fail, and failing to plan is planning to fail. You should decide your stop loss before you enter the trade.

Practical Examples

Example 1 - Morning Star at a significant support zone

Consider a stock that has been trending downward for a long time, now reaching a historical support level. Suddenly, it formed a Morning Star, followed by an aggressive bullish candle that provided momentum. This allows traders to get in ahead of the possible trend reversal and potentially profit from their investment.

Example 2 - Evening Star at Resistance

Now consider a currency pair that is holding an upward trend into a significant resistance zone. An Evening Star is formed and confirmed where the next candle closes very decisively below the last two previous candles. This allows traders to execute the first entry of the bearish correction.

Why traders like the patterns

Morning Stars and Evening Stars have become popular because they are easy to see and can be very effective if used correctly and in context. They signal small transitions in momentum that few indicators can gauge or miss.

Conclusion

Morning Stars and Evening Stars are more than patterns but represent a transitional change in control between buyers and sellers. Understanding how to recognize these trading setups will give you the ability to forecast possible reversals before they are formed.

However, no candlestick reversal pattern is 100 percent true; context, confirmation, and risk management systems are the primary keys to your success. Use Morning Stars and Evening Stars in your trading strategy with other technical systems and indicators like RSI, MACD, price action analysis, or candlestick patterns and methods. You will eventually develop a disciplined and adaptive trading strategy that is profitable and progressive in holding profits in the longer term.

Understanding how to combine and recognize various candlestick patterns will not tell you what the next price move will be. Still, it will undoubtedly enhance your understanding of the composition of market participants and provide you with greater confidence in your trades.