One of the most accurate ways of identifying changes in the market trend such as price reversals is through candlestick analysis and interpretation. The morning and evening star are the most common candlestick patterns.
The Evening Star Candlestick Pattern
The Evening Star is a bearish pattern that indicates price reversal. This pattern occurs at the peak of an uptrend when a reversal is just about to occur. The Evening Star is made up of three distinctive candlesticks:
- The first candlestick is large and white and is located at the peak of an uptrend
- The second candlestick is much smaller. It can be a bearish or bullish bar that appears just above the first candlestick.
- The third bar is a large bearish candlestick that starts below the second candle and ends close to the middle of the body of the first large bar.
The first large candlestick occurs on the first day of trading when the market is very bullish. On the second day, the bullish sentiments begin to die down but the prices remain relatively high, though not higher than the previous prices. At this point, the candle is smaller than the first and it can be neutral, bullish or bearish. When the candle is bearish on the second day, it is a strong indication of a reversal that could take place soon.
On Day 3, there are more bearish sentiments than bullish ones, causing the prices of the underlying asset to move further down. After the third candlestick, it would be safe to assume that a trend reversal has occurred and that the price is moving on its initial direction.
Evening star patterns can be very useful in determining trend reversals, particularly when used in conjunction with other indicators. A lot of traders use price oscillators and trendlines to confirm this candlestick pattern.
When trading the evening star pattern, execute your trade when the star is on a reverse trend against the primary downward trend.
The Morning Star Candlestick Pattern
The morning star is a bullish candlestick pattern. Just like th
e evening star, it is a reversal pattern that occurs at the bottom of a downward trend. The morning star is also made up of three candlesticks:
- The first candlestick is large, bearish and red in color. It occurs within a downtrend.
- The second bar is smaller. It occurs on day two when the markets are either bullish or bearish. This second bar can be white or red and occurs just below the first bar.
- The third candlestick is indicative of a bullish market. This white bar occurs above the second candle and ends close to the center of the body of the first bar.
On the first day of trading in a reversal market, the markets are usually bearish. On the second day, the market is still bearish but the prices do not go any lower. On the third day, the market is full on bullish.
A morning star formation can be very useful in determining trend changes, particularly when used in conjunction with other technical indicators.A lot of traders also use price oscillators such as the RSI and MACD to confirm the reversal.
To make the most of the morning star pattern, identify the pattern when the main market trend is on the rise. At this point, the morning star is a reversal of the upward trend. It is also a good idea to select tall candles when trading the morning star.