Morning Star Candlestick Pattern: Trading Rules Market Pulse

The larger the white and black candle, and the higher the white candle moves in relation to the black candle, the larger the potential reversal. The morning star candlestick pattern is a three-candlestick reversal pattern that indicates bullish signs to technical analysts. The first candlestick is a long bearish candlestick, followed by a small bullish or bearish candlestick, and finally, a long bullish candlestick.

The logic here is that the market should subside a bit following the Morning Star formation, providing a better entry for the long position. There are several ways that a trader can execute a buy entry using the Morning Star formation. One of the more widely used techniques for entering into a long position following the Morning Star formation is to wait for a breakout above the high of the third candle within the structure. When this occurs it provides confirmation of continued upside momentum following the Morning Star formation, which should lead to additional price gains to the upside.

Morning Star Candlestick Pattern

The evening star is a long white candle followed by a short black or white one and then a long black one that goes down at least half the length of the white candle in the first session. The evening star signals a reversal of an uptrend with the bulls giving way to the bears. Generally, a trader wants to see volume increasing throughout the three sessions making up the pattern, Morning Star Candlestick Pattern with the third day seeing the most volume. High volume on the third day is often seen as a confirmation of the pattern (and a subsequent uptrend) regardless of other indicators. A trader will take up a bullish position in the stock/commodity/pair/etc. As the morning star forms in the third session and rides the uptrend until there are indications of another reversal.

To determine the large and small body requirements, a minimum / maximum threshold has to be met. This is done by making a comparison to the average bar size found in the reference period. The minimum / maximum thresholds and the reference period used to establish the average are adjustable. Keep in mind all these informations are for educational purposes only and are NOT financial advice. Below you will find the price chart of the Euro to Yen currency pair shown on the daily chart. Now, although we’ve demonstrated this set up using the Stochastics oscillator, it would work equally well with other momentum oscillators such as the Relative Strength Index and the Williams %R indicator.

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When found in a downtrend, this pattern can be an indication that a reversal in the price trend is going to take place. What the pattern represents from a supply and demand point of view is a lot of selling in the period of the first black candle. Then, a period of lower trading with a reduced range, which indicates indecision in the market, forms the second candle. This is followed by a large white candle, which represents buyers taking control of the market. As the Morning Star is a three-candle pattern, traders often don’t wait for confirmation from a fourth candle before they buy the stock. Traders look at the size of the candles for an indication of the size of the potential reversal.

More specifically, when the price reaches the upper line of the Bollinger band, that is typically a good time to look for selling opportunities. Similarly when the price reaches the lower line of the Bollinger band, that is often a good time to look for buying opportunities. As such, our expectation would be for a price increase following the completion of the Morning Star pattern. As is clearly evident, after a few bars of sluggish upward price movement following the completion of the Morning Star, the price moved higher quite sharply, surpassing an important swing high level. The Stochastics indicator is a popular oscillator that provides oversold and overbought readings based on a default look back period of 14 days. The Stochastic oscillator has two primary lines, the faster percent K line which is more sensitive, and the slower percent D line which is less sensitive.

Is the morning star bullish or bearish?

Let’s now look at another filter that works well with the Morning Star set up. More specifically, when you incorporate an oversold reading from a momentum based oscillator, such as the Stochastics indicator, you will increase your chances of a successful trade. A target can be placed at a level with a profit potential double the size of the potential loss inherited in the trade. This is called the risk-reward ratio and a sensible trading strategy will always aim for a target that is larger than your potential risk. If you want a few bones from my Encyclopedia of candlestick charts book, here are three to chew on.

A candlestick chart with a long bearish candle, a short-lived bullish candle that gaps down from the first candle, and then a long bullish candle is what you want to find. Make sure the pattern is forming at the end of a downtrend or at the end of a consolidation period before trading it. Most of the candlesticks will be red if you select the default setting on your trading platform. It is well know that the morning star is a reversal pattern that mainly indicates that bulls are taking over the trend and bears are losing the grip. It is advisable to pair the pattern with other reliable indicators, support resistance levels, or trend lines to have profitable trades. The Japanese Morning Star candlestick pattern is a three candle formation that has a bullish implication.