Comprehensive Guide to Trading the Evening Star Pattern on eToro

What is an Evening Star Pattern?

The Evening Star Pattern is classified as a reversal pattern where it signals a change in the direction of a market – from a bullish trend, the market moves to a bearish trend. In other words, it is a bearish candlestick pattern that tells that the price is about to drop. Knowing this candlestick pattern will give a hint or warning that it is time to sell or secure positions to avoid possible loss.

The Evening Star pattern takes form at the end of a bullish trend but can also form within swings. It is composed of three candles – the first candle being bullish with a long body and short tails, followed by a second candle usually in the form of Doji or Spinning top pattern which has a thin body and varying tail lengths, and the third candle is a bearish candle with a long body and short tails.

Most of the time, gaps are also involved between the candles which denote buying and selling strength however, gaps are not a necessity for this pattern formation. The closing and opening prices of the first and third candles should not be much higher than the body of the second candle (as we can see from the image). Also, the most important factor to consider with regards to the physical traits of the candles is that the first and third candles should have a much bigger size compared to the second candle. Also, the bodies of the first and third candles should be much bigger than the tails.

This pattern forms when the strong pressure of buyers (indicated by the first candle) begins to have second thoughts of investing further (indicated by the second candle). After there is not much price movement (still indicated by the second candle), position holders start to sell (as indicated by the third candle) to avoid possible price drops caused by the slowing momentum of buyers.

This pattern is used greatly by many experienced traders because of its increased accuracy compared to other reversal patterns. Traders believe that it is a more dependable pattern for reversal since it makes use of three candles to affirm the movement of the market. the second candle which is usually a Doji or a Spinning Top pattern is on its own already a sign of reversal, however, having a third candle as a confirmation further improves the accuracy of the pattern.

How to Implement the Evening Star Pattern on Actual Trade

Just like other candlestick patterns, implementing the Evening Star pattern in an actual trade can be quite tricky and requires due diligence. Whenever dealing with chart patterns, we should not just consider their physical traits but also all other elements involved such as range, trend lines, range, buying and selling pressure, use of indicators, company disclosures, and many others.

As an example, let us use this chart from TESLA.

On this chart, we’ve used the daily range to detect the occurrence of the Evening Star pattern. This particular example shows two instances of the pattern which occurred between swings.

The first candles show the strength of the buyers (particularly the first formation), followed by a Doji or a spinning top pattern for the second candle, and a long bearish candle for the third. After each formation, the market dropped to a certain degree before reversing again. It is also noticeable that the bodies of the first and third candles are much longer or bigger than the second candle, and the candles have much smaller tails compared to the second candle.

Another example is for the asset – LTC, which is in the industry of cryptocurrency.

This particular example also shows that the pattern transpired after a swing, and the range was on an hourly range. While all the criteria for identifying an Evening Star pattern on this example have been fulfilled, we can also incorporate the use of another chart pattern with the Evening Star Pattern. For this case, we can combine the Double Top pattern with the Evening Star Pattern.

There are two peaks in this example and each peak creates a trend line that serves as a common resistance. As we’ve learned previously from our other articles about the Double Top Pattern, when two peaks touch a common level of resistance, the market is assumed to reverse toward a downtrend.

Having to combine the analysis of an Evening Star Pattern with other patterns, more reliable and more accurate assumptions are met.

What we Think of the Evening Star Pattern

The Evening Star Pattern is indeed among the most reliable and easy-to-use candlestick patterns for trend reversals. Compared to other candlestick patterns, it is much more accurate since it makes use of three candles – with its last candle serving more like a confirmation of the reversal.

The pattern likewise can be made more effective when combined with other chart patterns, and with the use of other indicators as well as trend lines, making sound decisions is possible.

This pattern is what many traders consider as a “giveaway” when executing decisions to sell because of its obvious or clear sign of reversal towards a bearish market or trend.

Now that you have full knowledge of the Evening Star Pattern, it is time to practice with it on the actual market. eToro comes with a virtual trading portfolio that enables you to trade on the actual market without having to spend anything. Virtual portfolios use virtual money to trade on the market. with this, you’ll be able to master reversal patterns such as the Evening Star Pattern in no time!

Good luck!

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