Two reliable candlestick patterns used on trading are the Morning Star and the Evening Star. These two patterns are multiple-candlestick formations.
Most price action traders prefer this type of pattern over any single-price-action pattern because there is more story and logic involved in it. For these traders, more the data they have, better they can analyze the charts.
This candlestick pattern is a little different from other multiple candlestick patterns, as this one deals with gap ups and gap downs. However, the occurrence of this pattern is quite uncommon in the Forex market, because the Forex market is 24/5 working market. So, any gap up and gap down is possible only once a week.
In this article, we will be going through what the morning star and the evening star pattern is, how is it formed, it’s precise interpretation, and trading strategies using price action techniques.
Getting Started: Concept of Gap up and Gap Down
In Forex, gap ups and gap downs are seen after a weekend. While in the stock market, it is seen on a daily basis.
Gap up: When a market opens above the previous day’s close, it is referred to as a gap up. It means that the buyers are willing to buy the currency/stock higher than the last day’s close. Hence, indicating the buyer’s strength. For example, let’s say a stock closed at $10. The next day the stock opens at $12. This is an indication that the buyers are so desperate that they are willing to pay a higher price than the previous day’s close price. So, no trading happens between $10 and $12, and the enthusiasm of the buyers leads the stock to gap up.
Gap down: A gap down is very similar to gap ups. When the market opens below the previous day’s close, it is referred to as gap down. This is an indication that the sellers are desperate to get rid of their position.
Now, that we know the concept of gap ups and gap down; let’s get into understanding the morning and evening star pattern.
The Morning Star Candlestick Pattern
The Morning star pattern is formed by three candles. It is a bullish candlestick pattern, where, the first candle is bearish; the second candle opens with a gap down which is a Doji/spinning top candle, and lastly, the third candle opens with a gap up which is a third bullish candle.
The representation of a morning star candlestick pattern is shown below
Interpretation of the Morning Star Candlestick Pattern
Consider the above figure; the first bearish candle represents that the sellers are in control of the market. The next trading session, the market opens with a gap down, indicating that the sellers are getting much stronger and desperate.
However, in the second candle, the price goes down but gets smacked right back up, leaving a tail on the bottom. Now question yourself. If the sellers were truly strong, why didn’t they hold the price down there?
This is an indication that something is wrong with the seller. Moving forward, the third candle opens with a gap up, and the candle closes bullish as well. In fact, the candle closes above the open of the first candle.
In this whole process of the failure of the price to go lower in the second candle, a gap opening on the second candle and a bullish third candle clearly indicates that the bulls have come into the market and have come in strong.
The Evening Star Candlestick Pattern
This candlestick pattern too is formed by three candles. This is a bearish candlestick pattern, where, the first candle is a bullish candle, the second candle opens with a gap down and closes forming a Doji/spinning top, and finally, the third candle is a bearish candle which closes below the first candle’s open.
Below is a figure that represents an evening star candlestick pattern
Interpretation of the Evening Star Candlestick Pattern
In consideration of the above figure, we can see that the first candle is bullish, indicating that the buyers have gradually begun to show up. The next candle opens with a gap and confirms the presence of the buyers in the market.
Well, since buyers are currently under control of the market, the buyers were supposed to take the market higher from there. But, they were unsuccessful in doing so. Also, the next candle opens with a gap down, showing that the buyers are significantly losing strength. Finally, when the market closes below the open of the first candle, we can undoubtedly say that the buyers are totally out of the game.
Trading the Evening Star Candlestick Pattern Using Price Action
Price action traders have their own way of analyzing and trading the evening star candlestick pattern. Some price action traders trade it just like any other ordinary trader, while some trade it quite uniquely. Well, let’s discuss the unique way.
Price action trader usually analyzes the charts in different timeframes. One is the higher timeframe, which is the time frame of the big players, and the other is the lower timeframe where we analyze the market in detail. However, when it comes to trading this pattern, we look for this pattern on the higher timeframe, because, the candles on this timeframe are moved by the big players.
Consider the below chart. Considering this to be our higher timeframe, we try spotting the pattern in this timeframe. Within the marked square, we can clearly see the formation of the evening star pattern. This means that the big players are preparing to go short.
However, we as a price action trader, we don’t hit the sell yet. We first analyze the location where the pattern has appeared by going down to a lower timeframe. In the lower timeframe, we can clearly see we right at the S&R of the sellers. So, we can conclude that the pattern has occurred in a logical location, where the sellers are situated.
Also, there is one more inspection we must do before we hit the sell. For this, we go down to an even lower timeframe and dissect the pattern thoroughly. In the below chart, we can see the market was making a higher high (HH) every step of the way. But, around the S&R area (orange line), the price was unable to make higher highs, in fact, it began to make lower highs (LH), indicating that the buyers are significantly losing strength. Therefore, now we can certainly say the market is going to drop.
From the above trade example; we realise that a pattern is not just a design, but is a story within.
We also gasp how timeframes and location play a vital role while trading a pattern as well.
Hence, if you put in all the efforts in understanding the story behind the pattern, you can take your trading skills to a whole new altitude. All the best!