Foreign exchange (forex) trading is all about predicting future market trends. Remember, it’s about buying the low and selling the high.
If the market is about to go up, you’ll execute a long position; if it’s about to go down, you’ll have a short position.
Monitoring the formation of the evening star candlestick pattern can help you in this process. It will signal that the market will have a bearish reversal.
Read this article as we further explore the concept of the evening star candlestick, a strong, bearish reversal indicator.
What Is an Evening Star Candle?
An evening star candlestick is a three-candle pattern that signals a potential market reversal. The first candle in this pattern formation is a long bullish candle, representing the ongoing uptrend. It should be followed by a small bearish candle, which suggests a potential reversal, which a tall bearish candle should confirm.
If you’re charting and notice this pattern formation, the name makes sense, as the middle candle—the small bearish candle—looks like a star in the sky or perhaps in the price chart peak.
But what (actually) happened to the market when this pattern formed? Well, it suggests that the bullish momentum of the market is about to exhaust in the first candle, the intervention of sellers on the second candle, and the selling pressure overpowering the market on the third and following candles.
How an Evening Star Works?
If you’re a technical analyst, this pattern formation can help you predict and prepare for the potential price downtrend reversal.
When the market forms an evening star pattern, it may indicate that it will reverse from its prevailing uptrend to a downtrend.
All three candles that form the evening star pattern are integral factors that contribute to the potential bearish reversal signal.
- Long bullish candle indicates the prevailing uptrend
- Small-bodied candle suggests the intervention of sellers in the market amidst the uptrend
- Tall bearish candle signifies that selling pressure is becoming prevalent in the market and driving the price down. Ultimately, this confirms the signal of a potential bearish reversal.
This chart pattern is best used with the 1-day time frame analysis for a stronger signal. This means that one candle shows a 1-day market period, one day of continuous uptrend momentum, another day of battle between buying and selling pressure, and another day where sellers dominate the market to confirm the bearish reversal.
Technical analysts monitoring evening star formation would start selling or shorting their long positions because of the potential price decline.
Note
Some beginner traders often confuse the Doji candle with the evening star. Remember, all Doji candles are evening stars, but not all are Doji.
Identifying Evening Star Candlestick Pattern on Chart
Although this pattern formation is indeed considered rare in the market, spotting one is simple because you only have to observe these market occurrences and confirm whether they happened in an orderly manner.
It must start in an uptrend
The preceding uptrend is extremely crucial when spotting an evening star candlestick pattern. This sets the stage for the pattern to indicate a potential reversal.
Remember, it’s only logical that the evening star candlestick pattern appears while the market trades upward. After all, what is a bearish reversal signal if it doesn’t form amidst the uptrend market?
The first candle must be a large bullish candle
Evening star patterns always start with large bullish candles, typically longer than the previous ones. This indicates ongoing bullish momentum or the idea that the market is still favoring buyers.
If the first candle isn’t large and bullish, you may be looking at a different pattern, like a Morning Star, or just a random grouping of candles.
The second candle must be really small and bearish
Is the first candle tall and bullish? If so, next thing to look at is whether the second candle is small and bearish.
The size of the second candle is crucial because it reflect market indecision and the beginning of a shift in momentum. This essentially indicates the exhausting buying pressure due to the intervention of sellers.
Note: The smaller the body, the more significant this transition is.
The third candle must be tall and bearish candle
The third candle in this candlestick pattern should a large bearish candle. It should open below the closing price of the second candle and in comparative size with the first candle that signal a decisive reversal.
There should be a subsequent price action
Lastly, you should observe the price action that follows the formation of the evening star candlestick pattern. This would help you further validate your analysis.
The candles after the pattern should lower highs and lower lows to ensure the continuity of the downtrend. Essentially, this ongoing bearish trend confirms that the market has indeed reversed from its previous direction.
How to Trade Evening Star Pattern?
As you already know, the evening star candlestick pattern is recognized by technical analysts as one of the strongest bearish reversal indicators. If you can trade it correctly, you’ll have a reliable reference on how the market will potentially move, thus profiting from and safeguarding your trades amidst the complex online trading.
Choose a strategy-appropriate time frame
When you monitor a certain asset, you can freely specify which time frame you want to monitor. This ensures you can personalize your charting with preferred market noise and focus only on meaningful trends.
There is a wide range of selections for this, which vary depending on the trading platform you use. These include minutely, hourly, daily, weekly, and even monthly.
However, our experts suggest using a 24-hour or 1-day time frame to trade evening star patterns, as this provides more accurate and actionable signals. Charting using this time frame allows buying and selling pressures to fully play out. This allows you to form a better perspective with market sentiment and potential reversals.
Chart the market
Like how it rules out in any price action analysis, it’s always essential to properly chart or monitor the asset you’re trading. Only upon monitoring the chart can you spot an evening star candlestick pattern formation.
Be cautious not to confuse the Evening Star with similar patterns, such as the Doji candle. While both can signal reversals, the Doji often reflects indecision rather than a clear shift in momentum.
Use together with other indicators
One of the core principles of technical analysis is to always monitor the market with more than one technical indicator, tool, or pattern.
The evening star is powerful, but its accuracy will improve significantly with other technical indicators. This includes momentum indicators or oscillators like the Relative Strength Index (RSI) and Moving Averages Convergence/Divergence (MACD).
This analysis approach reduces the risk of false signals as it strengthens and even confirms your analysis.
Execute orders with stop-loss and take profit
When trading any pattern, incorporating a risk management technique is vital to ensure your trades and investments are safe from the financial market’s inherent risk.
Once the pattern has fully formed and you’re confident with your multi-indicator analysis, you can now execute your trade. However, as mentioned above, always remember to place stop-loss and take profit orders.
A stop-loss order would limit your losses in case the market moves against your position. Moreover, a take-profit order ensures you lock in your position’s running profit.
Is Evening Star Candlestick Reliable in Forex Trading?
Due to their complex formation, evening star candles give strong bullish reversal signals. However, as a rule in using any technical indicators, it’s always advised to use them in conjunction with other indicators
Because of their complex formation, evening star candles give strong bullish reversal signals. However, as with any technical indicator, it’s crucial to use this indicator in conjunction with other indicators to ensure more accurate trend monitoring and prediction.
Price oscillators and trendlines are the two common indicators used to further analyze and predict bearish reversal.
Evening Star vs. Morning Star Pattern
You see, the person who named these candlestick patterns was really into something.
Both morning star and evening star candlestick patterns share the same structure: a tall first candle, a really small second candle, and a relatively bigger third candle. The only difference is the market condition at the time it was formed.
The morning star candlestick pattern is the exact opposite of the evening star. It is a bullish candlestick pattern; thus, it signals a bullish reversal upon the morning star candlestick pattern and confirmation with other price action indicators.
Note:
Morning and evening star candlestick patterns are rare because of their three-succeeding candle nature, unlike single-candle patterns like the hammer or shooting star candlesticks.
Wrapping Up: Should You Trade Evening Star Candlestick Pattern?
You will never go wrong in trading the evening star candlestick pattern. I mean, as long as you’ve done it correctly. Just remember, know how it works, how to spot it, and the best practices to trade it. Only then will the evening star pattern help you profit from and secure your trades.
Remember, there are numerous market patterns that you can use to execute your trades more effectively. By joining TradersUnited, you’ll have access to resources that will help you make informed trading decisions.
