Morning start, you might not associate the term remotely with technical trading. But the truth is, it is a popular candlestick pattern that indicates market trend reversal in a downtrend.
Candlestick patterns become popular among western trading fraternity during the 90s. In 1991, Steve Nison introduced candlestick charts to the western traders, and now it has become mainstream in technical trading.
If you aren’t a seasoned trader, who daily deals with charts and graphs, you may find it difficult to understand a candlestick pattern at first. But worry not! We will help you in understanding a morning star pattern and how to plan a trade around it.
At first, it may seem a bit tricky, but it is quite simple. A morning star pattern is a visual pattern made of three candlesticks. Analysts usually interpret it as a bullish sign. As in, an indicator that a trend will climb up after a fairly downward trend. Traders look for a morning star candle pattern formation in the charts, then use other indicators to confirm that a reversal of the previous price trend is occurring.
As you can see, in the first part of the pattern, a large bearish downward trend is established. On the second day, the downward gap is very small, and the price is not pushed much lower than day 1. The downward trend is said to be fatigued at this point. Day 3 begins with an upward bullish trend, leading up to the trend reversal pattern. While the upward gap is not as big as the downward gap of day 1, it eventually leads to neutralizing of the losses.
Inferring morning start pattern will require some more understanding. The small gap on day 2 can be bearish, bullish or neutral. A neutral gap forms a morning Doji star, which is a variation of the morning star that represents indecision in the market. Generally, a bullish gap foretells a trend reversal. However, it is day 3 that holds the most importance and signals true development.
Of course, a question will arise, what a Doji’ morning star is. Doji start is also part of the candlestick family. It appears when the market is in an indecisive state.
When the price action is essentially flat on day 2, the middle candlestick will be small with no obvious wicks.
The doji morning star candle pattern displays market indecision better than a morning star with a thick middle candle. A doji after a downward candle invites an aggressive volume spike, and consequently, a long upward candle as traders clearly identify the formation of a morning star.
How can you use the morning star to trade?
Morning star stock patterns are visual indicators of a trend reversal from downward to upwards. But they should also be grouped with other technical indicators. Volume is an important factor, for example. You want to see the volume increase through the course of the pattern, with day 3 seeing the most volume. If high volume and subsequent uptrend are observed, then the pattern is confirmed, irrespective of other indicators. Once the formation is complete over 3 days or sessions, traders can enter at the open of the next candle and ride the uptrend. Conservative traders delay their entry to observe the price action- to be sure that the stock prices are indeed increasing. However, in fast-changing markets, you could enter at a worse level with any delay. You and I both know that there are no guarantees in the market. You should always maintain a positive risk-to-reward ratio.
However, here is a word of caution. Relying solely on visual patterns, while trading is a risky venture. A morning star stock pattern should be considered when it is backed by volume and other technical indicators, like a support level.