Are you able to find trend reversal in chart pattern, then here is your answer, Morning star & Evening star candlestick pattern. These two pattern are most accurate and effective chart pattern which gives a correct signal from the Top and Bottom respectively. Lets deep dive into the both chart patterns, how to trade, what is risk and reward ratio etc.
Morning star candlestick pattern
A morning star is a three-candle bullish reversal pattern that appears after a price decline. To identify it, look for these characteristics: the first candle closes bearishly, indicating selling pressure. The second candle has a small range, showing indecision. The third candle closes aggressively higher, covering more than 50% of the first candle’s body, signaling a strong shift in momentum from sellers to buyers.
Here’s what a morning star signifies:
In the first candle, sellers dominate, closing the price lower. Which indicates that sellers are still in charge of the market
In the second candle, market indecision is evident as selling and buying pressures are balanced, resulting in a small range. The sellers don’t push the market much lower and this candle can be bullish or bearish.
In the third candle, buyers prevail, pushing the price higher. The bullish candlestick that gapped up on the open and closed above the midpoint of the body of the first day, this candlestick holds a significant trend reversal signal.
When this pattern occurs at the bottom of downtrend near a support level, it is interpreted as a powerful trend reversal signal.
In essence, a morning star indicates that sellers are exhausted, and buyers are temporarily in control.
In essence, a morning star indicates that sellers are exhausted, and buyers are temporarily in control.
Morning star & Evening Star candlestick Pattern: How to Trade?
From here we will discuss how morning star candlestick pattern helps to different type of Traders like Intraday, future & option trader, swing trader and even for investors?
Now lets see it with an example of Candlestick pattern formed in a Stock.
For an Intraday trader a suitable time frame is either 5 min or 15 min. Lets look here how a morning star help them.
And Similarly, For an Option trader how this candle can be a good decision maker. In option trading momentum in candle is most import with a time frame of 1 min to 5 min( any time frame you find suitable). If a morning candle forms then option buyer can buy call option with a 50% risk and from bottom. As the candle is a bullish reversal candlestick pattern, its gives significant buying confirmation to a option buyer.
You can see below it’s a 5 min chart of Powerfin Corp Ltd. Where after the formation of Morning candle in immediately after momentum came and two more bullish candle formed. Here a trader could have earned an 1:2 ratio profit.
Take 50% trade and then once you find trend reversed as planned, you can buy more call options till a 1:4 risk reward ratio. Just see below the example.
For a Short term Investor or Swing trader, morning star is significant candle which ensures entry for huge return. Generally 1 day to 1 week time frame is a standard for this kind of traders. Thus when you saw a morning star, take entry and wait till a 3 or 4 trading sessions till your target is achieved.
If at all, the pattern fails, i.e bullish reversal candle fails then immediately you can take exit at the stop loss point. Is not it great where you don’t have to be tensed a lot and getting ROI of 6-10% within few trading days.
If see the following example below, where a Morning candle formed.
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An evening star is a three-candle bearish reversal pattern that appears after a price advance. Here’s how to identify it:
What an Evening Star Indicates:
The evening star pattern is recognized as a bearish reversal pattern that typically forms at the peak of an uptrend. It comprises three candlesticks:
First Candle: A bullish candle.
Second Candle: A small candlestick, which can be bullish, bearish, or a Doji candlestick pattern.
Third Candle: A large bearish candle. (more than 50% of the first candle), signaling sellers have taken control.
Overall, the evening star pattern is the bearish counterpart to the morning star pattern.
Evening Candle looks like below
In essence, an evening star pattern suggests that buyers are exhausted, and sellers have temporarily gained control.
Lets understand with the real world stocks.
If you see the Formation of Evening star candlestick in Hindustan Unilever Ltd (HUL), the simply you can predict a reversal in stock momentum. At the top of the bullish candles, evening star indicated a Bearish reversal scenario.
What is the Right Strategy to Trade Evening Star Pattern
When Evening star chart pattern formed, the entry will be just below the closing price of middle candle. Similarly stoploss at little above the highest price of the middle candle.
Finding out an reversal is not that much hectic if you try to find from the Top of the bullish trend. This evening star is mostly accurate if it formed at the top, but it may be bit erratic if formed in the Sidewise market.
The goal of analysing these patterns step by step is to help you understand their significance and how to interpret them effectively. While it may seem like there are many candlestick patterns to learn, breaking them down individually makes the process more manageable.
Frequently Asked Questions
What Morning Star Candlestick indicate?
Morning star in chart pattern is Bullish reversal pattern which formed at the top.
Which pattern indicate a strong Bullish reversal?
Morning star candlestick is an important bullish reversal pattern along with hammer, bullish engulfing and piercing pattern.
Evening star candlestick is bullish or bearish pattern?
Evening star candle is bearish reversal pattern which formed at bottom.
When Morning star & Evening Star candlestick pattern forms?
When Uptrend has to reverse Morning star forms and when Bearish trend has to reverse Evening star is formed.