The use of candlestick patterns has been among the best strategies used in trading to gain profits out of every price movement. Candlestick patterns are divided into a few categories which include reversal, continuation, and consolidation. With these categories, a trader is able to identify his or her target market prior to engaging it. For this article, we’ll be focusing on a popular reversal candlestick pattern which is the Morning Star Pattern, and its counterpart which is the Evening Star Pattern.
Along with knowing its descriptions, let’s also find out how to implement these patterns on an actual trade on eToro.
(NOTE: Before we continue, we have to give a disclaimer that the trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. CFDs are complicated instruments that are never guaranteed to provide you supplemental earnings. In fact, Around 68% of all retail investors experienced a loss while trading CFDs. Make sure to keep this in mind before attempting to use the eToro platform yourself. All the information found on this website is not official trading advice and all practices shown are referenced for the use of the Demo account only.)
What is the Morning Star Pattern?
It is said that the more candles involved in a pattern, the more complex it is. Despite its complexity, however, an increase in the number of candles also means an increase in its accuracy because it makes use of other candles as confirmation. The same goes with the Morning Star pattern which is composed of three candles that signals a reversal.
The Morning Star pattern is a bullish pattern that signals trend reversal and develops at the end of a bearish trend or downtrend. It starts with a long bearish candle having little to no tailor shadow. The second candle that follows the bearish candle should be a Doji or a Spinning Top. It should have a small body and may or may not have a tailor shadow. The color of the second candle is irrelevant, what’s important is the size of its body which should suggest indecision among buyers and sellers. Lastly, the third candle should be bullish with the length of its body longer than its tails. The longer the body of the bullish candle is and the higher its volume, the more accurate is its reversal to a bullish trend.
Gaps are likewise a considering factor in the Morning Star pattern. Many analysts suggest that there should be gaps within the pattern for it to be considered a valid Morning Star pattern, however, gaps may not always be applicable in markets especially in the forex market. Just as long as the general descriptions are met along with a confirmation from the volume, the particular pattern is a valid Morning Star pattern.
Also, the second candle could be the most crucial candle to evaluate within the formation. Regardless of its color, it should have a thin body such as a Doji or a Spinning top pattern. Also, it should be at a much lower level than both the first and third candle. The Doji or the Spinning Top pattern as a second candle itself is a signal for reversal. Having the third candle in the Morning Star Pattern serves as a confirmation of the trend reversal.
What is the Evening Star Pattern?
The Evening Star pattern on the other hand is the counterpart of the Morning Star Pattern. It is a bearish reversal pattern that is also made up of three candles. It is found at the end of a downtrend or bearish trend.
The pattern starts with a long bullish candle, followed by a Doji candle having a thin or small body, and a bearish candle. Just like the Morning Star Pattern, the size of the body for the first and third candle should be bigger than the second candle. The second candle should be higher than either of the other candles.
The same as the Morning Star Pattern, the Evening Star Pattern depends solely on the second candle. The first, as well as the third candles, are mainly for confirmation purposes.
How to trade the Morning Star Pattern and the Evening Star Pattern
The Morning Star Pattern and the Evening Star Pattern usually develops at the end of a trend and on highly volatile markets. While these patterns are found using a day-range period, it can also be found in other time periods. In addition, trend lines are not necessary for this chart. What’s important is that the second candle should always be higher or lower than the first and second candle.
As an example, let us consider a few assets from eToro to represent these patterns.
The first image shows a Morning Star Pattern for Apple (AAPL).
With this example, the pattern developed after a downtrend. It started with a bearish first candle which considerable body, followed by a Doji candle having long tails, and ended with a bullish third candle.
In this example, we can see that the tails are varying and there have been no trend lines involved. Also, gaps are noticeable between candles. The second candle as well is much lower than either of the first and third candle.
Reversal is confirmed after the third candle.
The second example is from Microsoft (MSFT), which displays an Evening Star Pattern.
In the image, the pattern developed at the top of the bullish trend and reversed after it was formed. It has a bullish candle for its first candle, followed by a Doji candle having short tails, and a long bearish candle for its third candle.
Just like the previous example, gaps are noticeable between the candles and the sizes of the candles are varying. As well, there are no trend lines involved.
Based on the two examples, the first and third candles are mainly used as confirmations. The most important part of the pattern is the second candle. Having a Doji or Spinning Top as a second candle means that there is indecision during the particular trading day – both buyers and sellers can’t decide what to do during this period. Also, the second candle shows the slowing momentum of the current trend.
When trading a Morning Star Pattern or an Evening Star Pattern, it is important to consider the volume. The volume serves as a confirmation of the trend reversal.
Compared to other reversal patterns, the Morning Star Pattern and the Evening Star Pattern holds more accuracy than others. This is for the reason that it is composed of more candles to serve as confirmation of the price action. With a first and third candle, a safe entry and exit point can also be established.
With the Morning Star Pattern and Evening Star Pattern, you can have greater chances of making profits out of any trend on etoro.
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