The real bodies and wicks form key support and resistance levels. Read our post on how to draw support and resistance. Legendary rice trader Homma realized that there was a correlation between emotion and price movement in rice trading.

There are moments when the trend acts unusual and what you have thought is an evening star pattern can end up being a new bull run instead. It doesn’t happen too often, but you should be prepared for such a turn. More than that, if you make a mistake and think that you see an evening star pattern while it’s not, you can lose your investment.

The difference between the highest and lowest price during that trading day determines the candle’s length. A long candle denotes a significant price move, whereas a short candle denotes a minor one. The visual confirmation of this chart pattern is unique and is a reliable source of information. But for trades, the trader must get confirmation on whether a trend reversal is imminent from either indicators or oscillators like RSI, MACD etc. After getting confirmation from other indicators and check whether it is formed at the top of an uptrend and the stock is ready for reversal, a trader should initiate a trade.

evening star pattern

The idea is to go short on P3, with the highest pattern acting as a stop loss. Think about car driving; once you learn how to drive a car, it does not matter which car you drive. Driving a Honda is pretty much the same as driving a Hyundai or Ford.

Evening Star vs. Head and Shoulders

In this example, the new downtrend is a lasting one, but it takes its time trending lower. The Evening Star candlestick is a bearish reversal pattern that indicates a downward trend. The third day is another bearish candle that closes well off its high, creating a star shape as it does. The morning Doji star means a very accurate design that occurs in the forex market when the 2nd-candle is a “Doji”. In fact, the later candle indicates that bears are struggling to move prices much lower.

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The last candlestick is a long bearish candlestick closing below the first candlestick it indicates the beginning of a new trend. Evening Star is a reliable bearish reversal candlestick pattern with a success rate of about 70.2%. Its success rate in predicting bearish reversal is enhanced by using other technical indicators.

In other cases, the bulls may try to regain control after a downtrend is initiated with an evening star pattern. The chart above shows an Evening star pattern that did not perform and the trade, if taken, was a failed trade. The candle next to the third candle went below the third candle where the trader should make an entry. But after the price did not fall and again price started to go up. But it must be mentioned that there is no ‘Holy Grail’ in technical analysis. Here, in this chart of COAL INDIA stock, this formation was found.

Usually, at the top of an uptrend, we can see this candle. The first candle is a green (white/ blue) candle indicating bullishness. Day 2 continued Day 1’s bullish sentiment by gapping up. However, Day 2 was a Doji, which is a candlestick signifying indecision.

Evening Star Pattern Reliability

At the end of the second day, you can see that the range between the open and close prices is negligible. The price drops below the middle level on the first day. Please note that crypto markets work 24/7, meaning that this cycle can be shorter than three days. Once the evening star candlestick pattern emerges, traders may want to make use of it as a signal to put in a sell order.

A failed breakout may occur if the evening star pattern occurs in a small volume. The insufficient volume needed to push prices lower could result in bulls re-entering the market and overpowering the bears in the process, thus pushing prices back up. In the chart above, the Relative Strength Index indicates that the GBPUSD pair is overbought. As the price peaked while the RSI indicated overbought conditions, the Evening Star emerged, affirming the prospect of a trend reversal from the top.

  • Moreover, forex traders prefer the middle session to be a bullish indecisive one.
  • Therefore, the beginning of an evening star pattern can be useful in identifying viable selling opportunities at the time of bearish momentum.
  • The market opens with a gap down and proceeds into a red candle on the third day of the pattern .
  • Being unable to break a resistance area is a sign of reversal from an uptrend to a downtrend.
  • Correctly spotting reversals is crucial when trading financial markets because it allows traders to enter at attractive levels at the very start of a possible trend reversal.

Lastly, the third day shows a long red candle in which selling pressure has forced the price to around the midpoint of the first day. 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 indicates a large change in price, while a short candle indicates a small change in price. Although it is rare, the bill of exchange vs promissory note is considered by traders to be a reliable technical indicator. Another popular pattern signaling the upcoming trend change is head and shoulders.

Patterns Within Large Patterns

The third candle forms the first candle of the bearish downtrend. It also shows that lastly, the traders have largely decided to be on the bears’ side. This gap in price never closes as long as this trend continues. After the gap-down open, the price travels further down and at the end of the day, the candle closes at or near the lowest price of the day. Thus the candle is red and the new bear trend starts. The triple top pattern is very similar to the head and shoulders pattern described above.

Hence, the patterns form and change quicker than in traditional markets. The “body” of the candle shows the price range between its open and close positions at a certain time frame. The longer the body, the more significant the difference between the open and the close prices is. Apart from the body, there can be up to two “shadows” for each candle. Knowing the basics of the candlestick graph is a must if you want to learn how to read the evening star pattern. When these candlestick patterns are backed up by volume and other technical indicators like resistance level, then it confirms the signal.

evening star pattern

This pattern appears at the top of an uptrend and signals the slowing down of upward momentum. It announces a bearish move which lays the foundation for a new downtrend. It’s risky but it often is where the bigger risk/reward ratios are to be found. After getting the visual confirmation from this chart, the trader should find confirmation from other technical indicators.

Step #1: Wait for the Daily RSI to cross above 70

Before we understand the morning star pattern, we need to understand two common price behaviours –gap up opening and gap down opening. A daily chart gap happens when the stock closes at one price but opens on the following day at a different price. The morning star and the evening star are the last two candlestick patterns we will be studying. One of the best steps you can follow is to get confirmation of the move before placing an order.

While in the evening star pattern, the price reaches a new high on day two, in bearish harami, the second-day price is lower than the first-day price. In technical analysis, the Evening Star chart pattern is a three candlestick bearish reversal signal. While the pattern helps bears enter short positions to profit from price edging lower from the uptrend, it is also important as it helps bulls exit the market and lock in profits. Momentum indicators such as the Relative Strength Index and Stochastic can also help determine overbought conditions where the market is likely to correct and move lower. The evening star is an easy-to-spot bearish reversal candle given the three candlesticks in play.

Like other candlesticks, evening star candlestick must converge with other technical charts for confirmation. In the chart above, it is clear that prices were edging higher after the small pullback lower. However, after some time, the emerges at the top affirming waning upward momentum. Upon the closing of the third candlestick, affirming a shift in momentum from bullish to bearish, traders used the opportunity to close down all opened long positions.

In short, an evening star pattern is the bearish counterparty of the morning star candlestick. Besides, trading Morning Stars is very reliable in forex markets. Because price gaps rarely occur with currencies as they do with other financial assets like stocks. In fact, candlesticks forming this three-candle pattern often open near to the prior close price.

You’re starting with the longer-term chart to get the big picture of price action. The more the penetration of the close of the bearish candlestick on the third day into the price levels of the first day’s bullish candlestick, the stronger the bearish sentiment. Evening Star is a bearish reversal candlestick that appears at the top of an uptrend and signals a potential change in momentum.