It is thought that there are more than 100 designs based on Japanese candlesticks. We classify them into numerous categories, such as bullish vs. bearish, reversal vs. continuation, as well as basic and more complicated forms.
Both the morning and evening star patterns are regarded to be more complicated formations, largely as they are built on three sequential candles. As such, they appear more seldom than other patterns, notably the single-candle forms.
When the crypto market corrects, it often gets turbulent. Traders need a strategy to notify them to a likely correction so they can prepare for the volatility. Technical analysis, or spotting patterns and trends in market data, is the most popular approach for crypto traders to produce negative signals. Japanese candlestick patterns like the evening star pattern are famous because they may assist traders exit a bullish position to lock in winnings or establish a fresh short-sell position.
In this post, we’ll look at the candlestick pattern known as the evening star and discover how to trade it.
What Is an Evening Star Candlestick Pattern?
An evening star candle pattern is a three-candle configuration employed in technical analysis to identify bearish reversals. It comprises of a giant green candle, a second small-bodied candle, and a third large red candle.
The first candle of the evening star pattern is a massive green candle, which implies the bulls have total control, driving the market to a new high.
The following candle continues to run up to greater levels, but the strength behind the motion is insufficient, therefore the candle has a smaller body. Ideally, the second candle should gap higher on the open, but since crypto trades constantly — 24 hours a day, 7 days a week — gaps are unusual on price charts.
As the market begins to sell off, it creates a giant red candle. Often, the gains observed by the first candle have gone by the time this third candle completes.
These three candles collectively give crypto traders with crucial signals regarding wider patterns for the crypto market. The evening star pattern is often encountered near the end of an uptrend, suggesting the kickoff to a negative reversal.
Evening star patterns are connected with the apex of a price rise, signaling that the rally is nearing its end. The opposite of the evening star is the morning star pattern, which is seen as a positive indication.
Key Takeaways
An evening star is a candlestick pattern employed by technical analysts to anticipate future price reversals to the negative.
Although it is unusual, the evening star pattern is considered by traders to be a trustworthy technical indication.
The evening star is the opposite of the morning star pattern. The two are bearish and bullish indications, respectively.
How an Evening Star Works
A candlestick pattern is a means of condensely displaying specific information about a stock. Specifically, it depicts the open, high, low, and closing price for the stock during a specified time period.
Each candlestick consists of a candle and two wicks. The length of the candle is a function of the range between the highest and lowest price during that trading day. A long candle implies a substantial change in price, whereas a short candle suggests a modest change in price. In other words, lengthy candlestick bodies are suggestive of heavy buying or selling pressure, depending on the direction of the trend, whereas short candlesticks are indicative of little price change.
The evening star pattern is considered a very strong indication of future price reductions. Its pattern forms over a period of three days:
The first day consists of a huge white candle signaling a steady rise in pricing.
The second day consists of a smaller candle that signifies a more moderate increase in price.
The third day displays a giant red candle that begins at a price below the previous day and then closes towards the center of the first day.
Evening Star Candle Example
The chart below of Exxon-Mobil (XOM) stock displays an example of an Evening Star bearish reversal pattern that transpired near the end of an uptrend.
Day 1 of the Evening Star pattern for Exxon-Mobil (XOM) stock above was a powerful bullish candle. In fact, it was so powerful that the closing was the same as the high (extremely bullish indication) (very bullish sign).
Day 2 followed Day 1’s positive attitude by gapping higher. However, Day 2 was a Doji, which is a candlestick symbolizing hesitation. Bulls were unable to maintain the big surge of the previous day. They were only able to close marginally higher than the open.
Day 3 opened with a bearish gap down. In fact, bears seized control of Exxon-Mobil shares the whole day. The open was the same as the high and the close was the same as the low (a indication of strong negative emotion) (a sign of very bearish sentiment).
Also, Day 3 forcefully broke below the upward trendline that had provided as support for XOM for the previous week. Both the trendline break and the traditional Evening Star pattern provided traders a possible indication to sell short Exxon-Mobil shares.
How to Identify an Evening Star on Forex Chart
The evening star formation is very straightforward to spot since there are three candles working together to give you a narrative. The background and backdrop of the tale are that the pattern occurs after the market has already enjoyed an upsurge. The first candle of the pattern arrives with a huge green (or white) body to continue the current uptrend.
Recognizing the Evening Star on forex charts takes more than simply identifying the three main candles. What is necessary, is a grasp of recent price movement and where the pattern emerges inside the present trend.
Establish an existing uptrend: The market should be demonstrating higher highs and higher lows.
Enormous bullish candle: The considerable bullish candle is the outcome of large purchasing pressure and a continuation of the present uptrend. At this stage traders should only be looking for long trades as there is no sign of a reversal yet.
Tiny bearish/bullish candle: The second candle is a small candle - occasionally a Doji candle - that gives the first symptom of a weary rally. Often this flame gaps higher as it makes a greater peak. It does not matter if the candle is bearish or bullish since the essential message here is that the market is somewhat uncertain.
This large bearish candle is the first serious indication of renewed selling pressure. In markets other than forex, this candle gap down from the preceding candle's closure and signifies the start of a new downturn.
Following a successful reversal, traders will see lower highs and lower lows, but should always control the danger of a failed move with well-placed stops.
As the first flame burns out, the second candle begins with another small gain. However, the preceding candle's power is ebbing away. Many merchants have followed the trend, and purchasing power is dwindling.
As a result of the market's relatively equitable conflict between buyers and sellers, a small-bodied candle is produced. The candle may be red or green at this time. Either is OK, as it is more about the candle's tiny range in comparison to the prior green bar.
It is vital, however, that this small-bodied candle hits a new high above the previous. This small-bodied flame is what gives the structure its name; it resembles a star in the night sky.
The third candle then emerges. In an ideal world, the third candle would begin correcting lower, holding below the second candle's peak. The bullish momentum from the first two candles has entirely evaporated, and the sellers seize control while the buyers are nowhere to be seen. As a result, the market quickly corrects lower, wiping out virtually all of the preceding two candles' gains.
What about the Morning Star?
The Morning Star is the bullish counterpart of the Evening Star, and it indicates a potential turning point in a declining market (bullish reversal pattern). The same examination as with the Evening Star may be used to the Morning Star, but in the other manner.
Morning Star Candlestick Pattern Trading
As previously stated, morning star formations are less common than single-candle formations. They are more difficult to identify, aside from the fact that you basically have to meet all four prerequisites before you can confirm their presence.
In this instance, we're looking at the AUD/USD daily chart. The price had been declining until it established a new short-term low. Prior to this candle, a lengthy bearish candle had formed, indicating a severe slump.
However, the selling are unable to force a closure at the session's low, and the price rises to form a doji candle, indicating uncertainty among buyers and sellers. The next candle is a lengthy bullish candle that resembles a morning star pattern. We can now virtually confidently predict that the bullish reversal is set to begin.
The Evening Star Candle Pattern's Strengths and Weaknesses
The evening star is a highly powerful pattern, which makes it a favorite of cryptocurrency traders since it assists them in identifying a negative market turn.
The evening star is unique in that it needs three candles to create. This makes identifying the structure easy, as the candles must assume a definite shape.
Additionally, crypto traders appreciate the evening star because it enables them to profitably exit a bull market. Once the pattern is confirmed, the trader closes the entire position or a portion of it.
If the trader believes a broader bear trend is about to begin, he or she may consider establishing a short-sell position with a stop-loss above the pattern's peak. Prudent risk management involves aiming for a risk-to-reward ratio of 1:2 by doubling the distance between the entrance and stop-loss.
There is no such thing as a flawless pattern or indication, and the evening star is no exception. Simply because the pattern exists does not ensure that the subsequent price movement will be downward. At times, the evening star pattern may provide misleading signals, causing the market to surge.
How to Make an Evening Star Candle Trade?
The Evening Star pattern may be seen in the EUR/GBP chart below, where an established uptrend precedes the reversal pattern's creation.
Observing the chart, traders might attempt to enter at the open of the very following candle after the formation is complete. Conservative traders may choose to delay their entrance and observe market activity for a downward trend. However, the disadvantage is that the trader may join at a far lower level, particularly in fast-moving markets.
Targets might be set at prior levels of support or consolidation zones. Stops can be set above the current swing high, as a break below this level invalidates the reversal. Due to the fact that there are no assurances in the forex market, traders should constantly exercise prudent risk management while keeping a favorable risk-reward ratio.
When trading the Evening Star on the forex markets, prices seldom gap upward like they do in stocks, and so the three-candle pattern typically begins extremely near to the previous closing level.
Is the Evening Star Pattern Reliable?
By itself, the evening star pattern is a straightforward indicator of the beginning of a new correction. Additional technical analysis techniques can be used to amplify the signal given by this pattern.
As previously stated, when the pattern comes near resistance, a stronger signal is generated. The resistance level on a chart is the point at which buyers stop purchasing and sellers begin selling. Resistance levels can be established in advance of the formation of the evening star pattern.
As a result, if the evening star formation occurs around the resistance level, it is a stronger indication that a bear correction is going to commence.
On a chart, there are several sorts of resistance that may be formed. A horizontal degree of resistance is one of the simplest to determine. Our earlier examples utilizing Bitcoin and LINK demonstrate the potential strength of the evening star pattern when paired with horizontal resistance.
The evening star candlestick pattern occurs just above the moving average, indicating that the correction is likely to continue at its current depth. Bitcoin eventually corrects by another 7% the next day.
Evening Star Candle vs. Other Patterns of Trend Reversal
Crypto traders also pay attention to a variety of other bearish reversal patterns. Consider the comparison of the evening star pattern to the head and shoulders, bearish harami, and triple top patterns.
Head and Shoulders vs. Evening Star
The head and shoulders pattern is a well-known reversal pattern among cryptocurrency traders. There are significant distinctions between the head and shoulders and evening star patterns. The evening star design takes three candles to produce, although the head and shoulders pattern may need more candles. Indeed, the head and shoulders pattern cannot form in less than five candles. The head and shoulders design consists of three tiny tops within the main pattern, and so requires additional candles to finish.
By contrast, the evening star pattern will resemble a single rounded top. As a consequence, the evening star may be a component of the head and shoulders pattern, but the head and shoulders pattern may not be a component of the evening star.
Bearish Harami vs. Evening Star
Another popular pattern among cryptocurrency traders is the bearish harami. However, it is separate from the evening star.
The primary distinction between these two popular candlestick formations is that the evening star takes the shape of three candles, whilst the harami takes the shape of two.
Additionally, the second candle is the pattern's peak point. On the other hand, the first candle contains the harami's peak point.
Naturally, both the evening star and bearish harami's second candles are small-bodied. However, the second candle of the evening star becomes the pattern's high point, but the second candle of the harami gaps lower to form inside the body of the first candle.
Triple Top vs. Evening Star
The evening star and triple top motifs differ in a few ways.
To begin, the triple top pattern occurs in a sideways range. This indicates that price is trading sideways throughout the formation of each of the three tops. By contrast, the evening star is formed following an upswing, not during a sideways range.
Second, the triple top must be formed with a minimum of five to six candles. Evening star is a modest three-candle motif.
Finally, the evening star candlestick design may be incorporated into the triple top pattern, but not vice versa. The triple top is the more complex pattern, requiring the formation of three tops, whereas the evening star requires just one rounded top.
Final Thoughts
The evening star candlestick pattern's three candles make it simple to notice and recognize on a market chart. The evening star can assist traders in exiting a bull market or establishing new short-sell possibilities. While the evening star can occasionally create false signals, when used in conjunction with other kinds of technical analysis, such as horizontal resistance, it can dependably predict the start of a new decline.
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