The Morning Star pattern is a bullish reversal candlestick formation that signals a potential upward shift following a downtrend. It represents a transition from bearish to bullish sentiment, where increasing buying pressure begins to overpower the previous selling momentum. Traders often use this pattern to anticipate a potential price rise in the market.
What is the morning star candlestick pattern?
The morning star candlestick pattern is a three-candle bullish reversal signal, marking a shift from a downtrend to an uptrend. It features a long bearish candle, a small-bodied candle (often a doji), and a strong bullish candle closing above the first candle’s midpoint.
Identifying the morning star candlestick pattern
The morning star pattern consists of three distinct candlesticks, each playing a crucial role in confirming the reversal:
- Bearish candle: The first candle is bearish and relatively long, reflecting strong selling pressure.
- Downtrend: The pattern appears after an extended downtrend, indicating the potential for a reversal.
- Small-bodied candle: The second candle has a small body, showing market indecision and a possible shift in momentum.
- Bullish candle: The third candle is bullish and closes higher, confirming the reversal and signalling increased buying interest.
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How accurate is the morning star pattern?
The morning star pattern is generally considered a reliable indicator, particularly when used alongside other technical tools and in-depth market analysis. Its accuracy makes it a valuable asset for traders across different market conditions, providing clarity and confidence in trading decisions. However, no candlestick pattern guarantees absolute precision. To strengthen trading strategies, it is recommended to combine the morning star with additional technical indicators for a more robust and well-informed approach.
How to trade using the morning star pattern?
A Morning Star pattern visually indicates a potential market reversal from bearish to bullish, especially when supported by increasing volume. A high volume on the third day, signalling robust buying interest, often validates this reversal. Traders can consider entering a bullish position on the third day and ride the anticipated uptrend until there are indications of another reversal. Key strategies include:
- Stop-loss placement: Set a stop-loss at the lowest price in the pattern, providing a safety net if the anticipated reversal does not hold. This level acts as a key support, and a breach could mean the trend reversal is invalid.
- Entry points: Recognise the Morning Star after a prolonged downtrend. Look for a long red candle (showing selling pressure), followed by a doji or small-bodied candle (signalling indecision), and a final bullish candle to confirm the reversal. Enter the trade as soon as the pattern completes.
- Profit targets: Measure the distance from the lowest point of the first candle to the highest point of the third. Project this range upwards from the breakout level to estimate a potential profit target.
- Risk management: Implement robust risk management practices. Choose a suitable risk-reward ratio for each trade, where potential losses are limited, allowing room for profit gains. Adapt these strategies as per changing market conditions.
Doji morning star: A variation of the standard pattern
The morning star pattern has a variation in which the second candle is a doji pattern. The doji resembles a cross or a plus sign, with a body that is virtually just a horizontal line. This occurs because a trading session's opening and closing prices are practically the same, leading to a non-existent body.
When a doji appears as the second candle in the morning star pattern, it points to a period of significant indecision in the market. This is generally followed by a sharp increase in trading volume on the third day.
Morning star vs. evening star: The key differences
The evening star is the opposite of the morning star pattern in many ways. Here is how the two candlestick patterns are different.
Particulars |
Morning Star |
Evening Star |
Prevailing trend before the pattern forms |
Downtrend |
Uptrend |
Indication |
Bullish reversal |
Bearish reversal |
Appearance |
|
|
Confirmation |
Confirmed by a subsequent upward move |
Confirmed by a subsequent downward move |
Advantages and disadvantages of the morning star pattern
Advantages |
Disadvantages |
Confirms with other indicators: Traders can pair this pattern with other indicators for stronger validation of trend reversals. |
Interpretation plays key role: Requires careful interpretation, as variations in each candlestick may lead to subjective analysis. |
User-friendly: Simple and visually recognisable, making it accessible to traders of all skill levels. |
Can give false signals: Like all patterns, the Morning Star is not infallible and may produce false signals. |
Versatility: Useful across different markets, including stocks, forex, commodities, and cryptocurrencies. |
Limited application for short-term trades: Primarily suited for medium to long-term trends, with less effectiveness for intraday trades. |
Reliable reversal signal: Provides a dependable signal for potential reversals from a downtrend to an uptrend. |
Market conditions: The reliability of the Morning Star can be affected by volatile or illiquid market conditions, which may impact its accuracy. |
Conclusion
In a bearish market, the appearance of the morning star candle pattern can be a positive sign for interested buyers. However, if you are waiting for a bullish reversal in such a market and notice a morning star candlestick appear, ensure that you always confirm the pattern with other indicators like the trading volume, the fourth candle, and a good support level.
