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Trading The Morning and Evening Star Candlestick Patterns

It is believed that there are more than 100 patterns based on Japanese candlesticks. We divide them into various categories, such as bullish vs. bearish, reversal vs. continuation, as well as simple and more complex formations.

 

Both the morning and evening star patterns are considered to be more complex formations, mostly since they are based on three successive candles. As such, they occur more rarely than other patterns, especially the single-candle formations. 
 

Structures


The morning star is a bullish reversal pattern that occurs at the bottom of a downtrend. As other candlestick patterns, it only signals a potential reversal, an idea which should ideally be confirmed with other indicators

Four elements to consider for a morning star formation

  1. A downtrend must be in place since a morning star is a bullish reversal pattern
  2. The first candle should be a bearish candle, preferably longer
  3. The second candle should be indecisive as the bulls and bears start to balance out over the session
  4. ​The third candle should be a strong bullish candle, which practically all but confirms the reversal


morning star candlestick pattern

 

Although some analysts prefer to have a gap down, it is extremely rare to have gaps in Forex. Thus, many analysts argue that as long as these four conditions are met, it is a valid morning star pattern. 

It is important to note here that the second candle is the most important one. It can be bearish or bullish, as the focus is on indecisiveness and uncertain outcome as to which out of two sides will come out on top. 
 

The Evening Star formation

The evening star, on the other hand, has the same structure and it is also a reversal pattern. Unlike the morning star, the evening star occurs at the top of an uptrend and it signals a potential change in the price direction. 

evening star candlestick pattern

All four conditions present in the morning star structure are valid here as well. Near the end of an uptrend, the first candle should be long and bullish, the second one should be at the top and signal indecision (green or red), while the third and final candle signals a reversal is starting, as the buyers are no longer in control over the price action. 

 

You can use the historic price action and analyze the structure and behaviour of the morning and evening star patterns on the Metatrader 5 trading platform, which you can access here.

Trading the morning star candlestick pattern

As said earlier, the occurrence of a morning star pattern is not as frequent as those of a single-candle formation. They are harder to spot, aside from you practically needing to fulfil all four conditions before you can verify its presence. 

 

In this case, we have the AUD/USD daily chart. The price had been trading lower until the point where it created a new short-term low. Prior to this candle, there is a long bearish candle that signals a strong downtrend.


how to trade an evening star candlestick formation

However, the sellers fail to force a close near the session’s low and the price rebounds higher to create a doji candle, which signals the indecision among the buyers and sellers. The next candle is a long bullish candle which forms the morning star pattern. We can now be almost certain that the bullish reversal is about to start taking place.

You may play it safe and wait for the next candle, fourth in a series, and see if it will be of a bullish nature. If the answer is yes, the reversal has started. Thus, how do you trade the morning star candlestick pattern and make profit?

First, you don’t open a long trade before the formation is fully formed. In a chart above, you see our entry reflects the closing price of the third candle. The stop-loss should be placed below the prior candle’s low, which is also the lowest price printed in the recent sessions. As always, allow for around 10 pips beneath the low to protect your trade against the whipsaw. 

A take-profit order should be determined based on the technical analysis. You can use the previous resistance (as we did in this case), or a specific moving average, Fibonacci retracement/extension or similar. We opted for the most recent swing high, which is also a horizontal resistance. 

Ultimately, the bulls pushed the price towards this level and our trade is closed in green. As for the numbers in this trade, we risked around 80 pips to gain around 150 pips, which results in almost a 2:1 risk reward ratio.

Trading the evening star candlestick pattern

As for this example, we have a NZD/USD daily chart. The price action trades in a clear uptrend as there is a long series of the higher highs and higher lows, which results in gains of 300+ pips. At one point, the bullish candle signals that the bull run is still intact. However, the next candle changes the picture.

Metatrader 5 pattern

It’s a doji candle at the top of an uptrend, which signals the indecision among buyers and sellers as they fight to determine the future trend direction. Finally, the third candle is a long bearish candle, and the evening star formation is created, as all four elements are in the place. 

 

Moreover, the first candle next to the evening star is another red bearish candle, which further validates the idea of a reversal. At this point, we can be very confident of an upcoming decline. 

The evening star candlestick pattern is traded after the third and final candle is created. At this point, we can open a short trade with a stop loss above the second candle’s high. A profit-taking order should be placed lower, depending on other technical indicators e.g. Fibonacci, moving average, trend lines etc. 

 

In general, the stronger the uptrend that just ended, the stronger a reversal should be. Profit taking order(s) are also dependent on your trading style and risk tolerance. In general, traders tend to aim for a 2:1 risk reward ratio.


You are now hopefully better equipped to trade these two candlestick patterns. Before you start trading live, we strongly advise you to master these trading techniques and formations on a practice account. You can open a demo account here. By trading virtual funds you will protect your capital before you reach a level where you are ready to trade live.

 

Summary

The morning and evening star candlestick patterns are reversal formations that occur at the end of a strong trend in one of the two directions. A morning star is a bullish reversal pattern which signals a potential reversal, after the sellers lost control over the price action. It consists of three candles, where the first one is of a bearish nature, the second is the one with an uncertain outcome (usually a neutral candle), while the third one initiates a reversal. 

The evening star is of the same design as the morning star, except that it is a bearish pattern that occurs at the top of an uptrend. It also signals a potential change in the price direction as the buyers lose momentum following a strong uptrend.

 

 


 

 

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