Evening Star Trading Pattern

Christopher Lewis

When it comes to the three most important candlestick patterns, one of the most popular ones would be the evening star, and its inverse, the morning star. This pattern can be a good predictor of a short-term directional movement about to happen, so if you learn what this is and how to identify it on a price chart when it forms, you can use this knowledge to become a more profitable trader.

Although it is not one of the more common patterns, it certainly attracts a lot of attention when it occurs. This is because the pattern can only form after a gap in liquidity happens twice within three candlesticks. Because of that, this will almost always happen only on a daily chart, and only in the weekly timeframe in Forex charts as the market is 24/5, but with the massive amounts of liquidity you are going to see these patterns occur mostly in commodity or stock markets and not in Forex.

What is the Evening Star Candlestick Pattern?

The bearish evening star is a three-candlestick pattern that has a long and bullish candlestick for the first candle, followed by a gap higher on the second candlestick that also has a very small range. This is said to represent a star in the sky that is signaling it is nighttime, therefore bearish. The third candlestick is a gap lower, and a longer candlestick.

How the evening star candlestick pattern works: by the time this pattern is formed you will see a gap higher, followed by a gap lower and extreme selling pressure. This suggests that the buyers have been blown out, offering more downward pressure than anything else. This often signifies a significant selloff just waiting to happen. While most people look at this as a candlestick pattern that should be at a swing high, it can be found anywhere on a chart.

For an example of the evening star candlestick pattern, examine the below chart of Nike stock. In the highlighted area, you can see that the market had been in an uptrend, gapped higher to form a short candlestick, and then gapped lower on the third day to show signs of exhaustion. Most traders will short this set up on a break below the bottom of the lowest of the three candlesticks, with a stop loss at the top of the star (the middle candlestick) itself. While some purists suggest that the “star” must be a doji, the reality is that the star just needs to be smaller than the other two candlesticks, showing a slowing of momentum.

Evening Star

What is a Morning Star Pattern?

As with most candlestick patterns, there is also an inverse version. The “morning star” is the exact opposite of the evening star, with a long bearish candlestick, a gap, and then another gap that produces a long bullish candlestick. In other words, the exact opposite, so this pattern is bullish. The idea is that the sun is rising, and it should bring in light, or bullish pressure. These of course are based upon descriptions of ancient Japanese candlestick charts.

The usual way to trade this pattern is simply by buying on a break of the highest of the two long candlesticks, with a stop loss being placed below the bottom of the star. I have picked out another example below using Nike stock, because it shows multiple reasons to think that the pattern will work. Not only do you have the pattern itself, but you also have the first candlestick which ended up being an “inverted hammer” and breaking above the top of that wick itself was a good signal to go long. You can see that the market took off from that point as we gapped higher, pulled back to fill that gap, and then turned around to race towards the $59 level.

Morning Star

Evening Star and Morning Star Patterns in Forex

It should be noted that most of the time you see an evening star pattern in Forex, it will be on the weekly time frame. This very rarely happens, so it is obviously a very strong sign when it does.

 

This means that the evening star pattern is quite reliable in Forex when it forms on the weekly chart. Some exotic pairs can form these candlesticks a little more easily than others, for example the Russian ruble which does not necessarily trade 24 hours a day, depending on the broker. That is another massive issue with trading this candlestick pattern in the Forex markets, because not all brokers keep the same hours. In other words, your feed may show one of these patterns, but it might only be because the exotic currency trades only during a limited period. Therefore, the pattern is generally not recommended to be traded in currency pairs on the daily chart.

You can use these patterns in other, non-Forex markets that close on a daily timeframe. For example, futures markets do close for about an hour per day, sometimes more depending on the market. In this scenario, this candlestick pattern can form. Check out the example below, it is a gold futures market chart that features a morning star pattern, which is highlighted.

Gold

Conclusion

Depending on the market you are trading, these patterns do tend to be very useful. After all, you need to keep in mind that there had to be something to make the market gap higher, then lower, or vice versa. In other words, as soon as one side of the market gained ground, the other side came back and took it away from them. That is a very powerful signal because it shows a sudden shift in attitude of the course of just a couple of days. While this is a very rare pattern in the currency markets, they do tend to work very well in the stock commodities markets, because these markets are generally less liquid than Forex.

FAQs

How do you trade the evening star candlestick pattern?

On an evening star pattern, you short the market at the lowest of the two longer candlesticks. The center candlestick, the star, is where you place your stop loss above. For the morning star pattern, you enter the trade on a break above the higher point of the first and third candlestick, putting a stop loss below the middle candlestick.

What are morning star and evening star candles?

These candlesticks are simply a small candlestick between two conflicting and long candlesticks. For example, if you get a long bullish candlestick, a short candlestick in the middle, and a long bearish candlestick, that short candlestick is the evening star. As for the morning star, it is a long bearish candlestick that is followed by a short candlestick, and then followed by a long bullish candlestick. The morning star is the center candle in that scenario.

What is a doji?

A doji is a candlestick that is neutral, with little or no real body. These candlesticks can signify potential exhaustion at over-extended levels or support and resistance, but by themselves aren’t particularly meaningful.

What is a tweezer top in Forex?

The tweezer top candlestick pattern in Forex is seen whenever there are two similar candlesticks making a high with long upper wicks rejecting the high. These candlesticks are called “tweezers” because they look like tweezers.

Christopher Lewis

Christopher Lewis has been trading Forex for several years. He writes about Forex for many online publications, including his own site, aptly named The Trader Guy.

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