Star Formations Spotlight Luminary Trades

By John Devcic AAA

Candlestick charts are a favorite among proponents of technical analysis. There are many different types of candlestick patterns; learning to identify them can greatly improve your chances of making profits in the securities you trade. This article will focus on three patterns that have proved to be very reliable over time: the morning star, the evening star and the doji star. All three of these patterns will usually foreshadow a change in the current trend. The best way to benefit from these patterns is to identify them early. Read on to learn the distinct characteristics that will help you find them.

Morning Star
The morning star is formed by three candlesticks:

  1. A long black/red candlestick. This candlestick occurs when the close is lower than the open and is often shown as the color black or red.
  2. A small white (close is higher than the open) or black candlestick that gaps below the close of the previous candlestick. If this candlestick is a doji, then this pattern would be a morning doji star. The second candlestick is much smaller then the first one.
  3. A long white candlestick.
Figure 1

As you can see in Figure 1, the black candlestick enforces the current decline. The selling pressure still outweighs the buying interest. Once the second candlestick gaps down, this provides additional proof that the selling is still going on. This selling slows down significantly, as the second candlestick shows that there is indecision in the conviction of the current selling pressure or that the selling pressure has gone too far. The third candlestick shows that a reversal is in order and this provides bullish confirmation of the reversal. If the second candlestick is a doji, the chances of a reversal are much greater.(For related reading, see Retracement Or Reversal: Know The Difference.)

Criteria:

  1. The market/stock is in a current downtrend.
  2. There is a long black candlestick.
  3. Following the long black candlestick is a short candlestick in the direction of the previous downtrend.
  4. The third candlestick must be a long white candlestick.

These four criteria must be in place in order to have a proper morning star pattern. This pattern is a bullish reversal of the current downtrend. Once this pattern has been properly identified, the price will usually go up. (For related reading, see The Art Of Candlestick Charting Part 1.)

Evening Star
An evening star can also be called a bearish evening star because it signifies a top in the current trend. The evening star is formed by:

  1. A long white candlestick (strong up day).
  2. A small-bodied candlestick that closes above the first bar. Usually this candlestick can be identified easily by the gap in the higher direction. This small-bodied candle can represent either an up day or a down day. The direction of the middle candle is unimportant because it is the lack of conviction that the trader is interested in.
  3. A long black candlestick that will close within the first white candlestick.
Figure 2

The long white candlestick is a signal of the current uptrend, indicating that the bulls are clearly in control. The small-bodied candle that is found at the top of the gap signifies that the bulls' conviction may be weakening and a change may be in sight. The third candlestick signifies that the bulls are no longer in command and buying power is indeed weakening. This pattern signals a reversal in the uptrend. The evening star is the reverse of the morning star.

Criteria:

  1. Market/stock is in an uptrend.
  2. A long white candlestick.
  3. Following the long white candlestick there is a short-bodied one that continues in the upward direction of the white candlestick.
  4. The third candlestick must be a long black one.

You must have these criteria in place before you can correctly spot this pattern. The second candlestick is what will alert you to a possible change in the current trend. The third candlestick officially signals the reversal of the uptrend. Once the evening star has been identified, the current uptrend has reached its peak.

Doji Star
The doji candlestick occurs when the session opens and closes at the same level or very close. It is a vertical line crossed by a horizontal one, signifying that the open and close levels are virtually identical. The pattern can look like a cross, an inverted cross or a plus sign. When you see a doji, it usually signals to chartists that there is indecision in the current trend. Often this is called a tug of war between buyers and sellers as to the future direction of the price. If this pattern is found within a prolonged trend, it can be used to signal a potential shift in momentum.

Figure 3

You can have an evening doji star or a morning doji star. This means that in either pattern the middle or second candlestick is not a short-bodied candlestick but a doji star. This signifies that the chances of a reversal are much greater because the doji shows us that neither the bulls nor the bears have any strength and that the given trend is losing steam. (For related reading, see Find A Trend With The Partial Retrace.)

Conclusion
The three patterns introduced in this article may be new to you, but they can successfully signal a change in the current market trend. Looking for these patterns and learning to spot them is no easy task, but if you work hard, study the patterns and keep an eye out for these formations you can use them to help you make better trades. Novice chart readers may find these patterns difficult to spot at first. Practice and repeated chart reading will help you to overcome this difficulty. Paying close attention to the characteristics of each of the formations will make spotting them much easier. Remember, the most important thing is to take your time when learning to spot candlestick formations. Paper trade based on your candlestick pattern identifications to make sure you are confident in your analysis.

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