Japanese candlestick patterns are as unique as their names. Used for describing a wide variety of market trends these patterns are consulted frequently by technical traders. But it requires skills and detail understanding to be able to interpret candlestick patterns. In this article, we will discuss the evening star candlestick pattern and how to interpret it in a chart.
Evening star patterns and what do they signify?
These patterns are indicative of a market’s top and bottom. While the evening star pattern is a three-bar candlestick pattern that typically occurs at market tops, the morning star pattern is seen when the market bottoms.
The evening star is a strong indicator that a downward trend has started. The pattern typically forms over a three day period. On the first day, you will be able to see a large white candle indicative of sustained price rise; this will be followed by a smaller candle that shows a relatively smaller price rise. The third day will be a large red candle that opens at a price below the second day and then ends near the middle of the first day.
The morning star pattern is the exact opposite of the evening star pattern. It appears in a downtrend indicating the trend reversal. For a morning star, the first candle is a red candlestick, followed by a small one, which is called a start, and then a large white candle.
Both stars indicate a strong trend reversal. But these may not be indicative enough when studied in isolation. Like other candlesticks, evening star candlestick must converge with other technical charts for confirmation.
Candlestick patterns are a rare pattern to appear, but they are known to be an accurate indicator. It is so widely trusted that some algorithmic traders execute buy and sell decisions based on these patterns. Like, evening star candlestick, which indicates trend reversal and onset of bearish trend may warn off traders to make buying decisions. Similarly, a morning start pattern indicates return of bullish trend and helps traders prepare for entry into the market.
However, the star patterns aren’t the only patterns used to identify trend changes. Traders also use bullish or bearish harami candlesticks to understand market movements.
A bullish harami appears when a large red candle appears in a downtrend. It is followed by a smaller green candle that opens higher than the large red candle and closes lower. It is a sign that the bulls are taking control of the stock, and the selling pressure is easing. Traders tend to take a long position when this pattern appears.
Forming trading strategy with evening star candlestick
Ideally, traders should look to enter at the open of the next candle, but if you are a conservative trader you may delay your entry and wait to see if the price action moves lower, however, by doing this you run the risk of getting into a much worse level in a volatile market.
Besides, you can place targets at previous support levels or for that matter at the earlier area of consolidation.
What are the pros and cons of evening star candlestick?
If you are trading in the forex market, the evening star candlestick appears frequently, and therefore you may find it challenging to make decisions on that basis every time. Besides, a failed reversal is also a possibility, and the price may move further up.
Having said that, the pattern gives you well-defined entry, and exit levels and the pattern is easy to identify too.
How to identify an evening star on a Forex chart?
This can be achieved by identifying four main candles:
– Large bullish candle: The large bullish candle is an outcome of large buying pressure. A trader should ideally be looking for long trades.
– Small bearish or bullish candle: The second one is a small candle which indicates the initial signs of a slowing uptrend. This may well be interpreted as a market without a direction or undecided market.
– Large bearish candle: This is the initial sign of new selling pressure
– Bearish Evening Star Candle formation: Traders will often look for signs of indecision in the market. Markets tend to be flat, and it is the ideal place for a Doji candle to emerge.
In conclusion, the evening star pattern can provide a trader with an indicator for entry or exit point. The exact opposite of the same is a morning star pattern.