Morning Star and Evening Star Patterns

In technical analysis, there are a few candlestick patterns that are highly reliable trend reversal indicators. Of all, Morning Star and Evening Star are the chart patterns in which signals can be seen for the change in market momentum. These chart formations offer clear hints as to when a trend is losing steam, thus giving the traders the best entry and exit points.

This article examines the Morning Star and Evening Star patterns, how those patterns work, and several effective ways of using them when trading.

1. Morning Star Pattern: A Bullish Reversal Signal

The Morning Star is a bullish reversal pattern that occurs at the end of a downtrend. It indicates that selling pressure is weakening and buyers are starting to take over.

How to Identify a Morning Star Pattern

• The first candle is big and bearish.
• It also sets an example where the second candle, typically small, reflects the market indecision.
• The third candle is big and bullish, closing near or above the midpoint of the first candle.

Reference of the Morning Star Candlestick

Example: Tata Motors and Morning Star

Image Courtesy: Tradingview

Suppose that the trend of Tata Motors is continuously downwards. The first day forms a big red candle with strong selling pressure. The second day is a small Doji, representing indecision.

On the third day, a strong green candle closes above the midpoint of the first red candle. This Morning Star pattern has changed the momentum, which now indicates that the buyers have started coming in and a bullish reversal may take place.

To a trader, this could serve as an indicator of buying into the market, as through this pattern, it would appear that in the very near future, the trend might change from bearish to bullish.

2. Evening Star Pattern: Bearish Reversal Signal

The Evening Star is a bearish counterpart of the Morning Star, signaling that an uptrend is over. The Evening Star occurs at the top of an uptrend and involves three candlesticks:

How to Identify an Evening Star Pattern

• The first candle is big with a bullish body.
• The second candle is small and indecisive, showing buyers are losing momentum.
• It is third, big, and bearish. The close is near or below the midpoint of the first candle.

Reference of the Evening Star Candlestick

Example: Evening Star in Reliance Industries

Image Courtesy: Tradingview

Reliance Industries had also been moving in an uptrend and making steady gains. A large green candle forms on the first day of this pattern, followed by continued buying pressure. Then, on the second day, a small Doji is formed that indicates indecision.

The third day finally closes a large red candle below the midpoint of the first green candle, giving an Evening Star pattern. A formation of the Evening Star would mean a loss of uptrend momentum and a likely bearish reversal.

This pattern could show up and be a reasonably decent signal for traders to sell or take profits in front of the trend reversal.

While these patterns are strong telltales, confirmation using other tools increases their certainty. A few ways to confirm these signals include the following:

• Volume: A volume that outperforms the volume of the third candle in the morning or evening star helps reinforce the chances for a reversal.
• Support and Resistance Levels: A Morning Star near a support level adds credibility to a bullish reversal. Similarly, an Evening Star near resistance strengthens the bearish signal.
• Technical Indicators: Confirm these patterns with other tools, like the Relative Strength Index or Moving Averages. For example, if RSI shows that the conditions are oversold and the formation of a Morning Star occurs, the chances for a rebound are higher.
  

The Morning Star and Evening Star are excellent chart patterns for the identification of turning points. This is how traders use them:

• Morning Star: Long positions can be opened after the third bullish candle. Place stop-loss orders below the low of the second candle.
  
• Evening Star: Close long positions or sell after the third bearish candle. Consider setting stop-loss orders above the high of the second candle for protection against fake signals.
  

These patterns work best when combined with a disciplined approach to trading and good risk management practices.

In conclusion, Among the most powerful candlestick patterns that help a trader predict reversals are the Morning Star and Evening Star. The Morning Star forms a bullish trend reversal when buyers take control after a downtrend, while the Evening Star signals a bearish reversal when sellers take over an uptrend.

These patterns turn out to be more valid in combination with volume analysis, support/resistance levels, and technical indicators. Mastering these formations means the ability of traders to make well-grounded decisions concerning entry and exit from positions and, correspondingly, to gain maximum profit with minimum losses.