What Is a Star?
A star is a type of candlestick formation that is identified when a small-bodied candle is positioned above the price range of the previous candle as a result of a gap in the underlying asset price.
A star is one of the four categories (quadrants) of the BCG growth-share matrix that represents the division within a company that has a large market share in a rapidly expanding industry.
- A star is a candlestick pattern characterized by a small-bodied candled appearing above the high of the previous candle.
- A morning star is a visual pattern made up of a tall black candlestick, a smaller black or white candlestick with a short body and long wicks, and a third tall white candlestick.
- The opposite pattern to a morning star is the evening star, which signals a reversal of an uptrend into a downtrend.
Small-bodied candles in the star position often suggest that market participants are becoming indecisive and that the strength of the current trend could be reversing. For a valid star pattern, most traders will watch for small-bodied candles to follow a large-bodied candle because this setup generally leads to a higher probability of a true trend reversal than when the body of the first candle is small.
A star requires investment capital to expand continually within a fast-growing industry, thus maintaining its advantage. Should the industry mature with the star positioned as a leader, the star will transform into a cash cow.
Stars are visually-identified patterns and not technical. Trading purely on visual patterns can be a risky proposition. A morning star is best when it is backed up by volume and some other indicator like a support level. Otherwise, it is very easy to see morning stars forming whenever a small candle pops up in a downtrend.
Morning Star vs. Evening Star
A morning star is a visual pattern consisting of three candlesticks that are interpreted as a bullish sign by technical analysts. A morning star forms following a downward trend and it indicates the start of an upward climb. It is a sign of a reversal in the previous price trend. Traders watch for the formation of a morning star and then seek confirmation that a reversal is indeed occurring using additional indicators.
The opposite of a morning star is, of course, an evening star. The evening star is a long white candle followed by a short black or white one and then a long black one that goes down at least half the length of the white candle in the first session. The evening star signals a reversal of an uptrend with the bulls giving way to the bears. The gap between the real bodies of the two candlesticks is what makes a spinning top a star.
The star can also form within the upper shadow of the first candlestick. The star is the first indication of weakness, as it indicates that buyers were unable to push the price up. This weakness is confirmed by the candlestick that follows the star. This candlestick must be a dark candlestick that closes well into the body of the first candlestick.