What is 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 assets 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.
BREAKING DOWN Star
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.
Morning Star vs. Evening Star
Spotting the morning star signal is fairly easy; it is visually obvious to the eye. There are some very simple parameters that can enhance the Morning Star signal’s probabilities of creating a reversal. For instance, the longer the black candle and the white candle, the more forceful the reversal. This demonstrates a more severe change in investor sentiment. The more indecision that the star day illustrates, the better probabilities that a reversal will occur. Also, a gap between the first day and the second day adds to the probability that a reversal is occurring. A gap before and after the star day is even more desirable. The probability of a Morning Star signal reversing a trend becomes extremely high when found in oversold conditions.
By contrast, the Evening Star is a bearish, top trend reversal pattern that predicts a potential reversal of an uptrend. It is the opposite of the Morning Star and, like the Morning Star, it consists of three candlesticks, with the middle candlestick being a star. The first candlestick in the evening star must be light in color and must have a relatively large real body. The second candlestick is the star, which is a candlestick with a short real body that does not touch the real body of the preceding candlestick. 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.