Evening Star Forex Pattern
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The evening star forex pattern is a popular type of pattern. Among several trading strategies, and technical analysis techniques available to the traders, the evening start attracts several traders.
Technical analysts generally use this pattern to detect when the trend is about to reverse the forex pattern. This pattern can be seen frequently in many price charts; however, the best and most effective formation will generally consist of those at the top of the uptrend patterns.
Therefore, these formations would be considered the most reliable types of the Evening star formation.
What do you need to know about the evening star candlestick pattern?
The evening star forex pattern predicts a hypothetical future price reversal to the downside. It is a bearish reversal candlestick pattern consisting of three different types of candles: a bearish candle, a small-bodied candle (also known as the Doji candle), and a large bullish candlestick.
The Evening star pattern appears to be on the top of a price uptrend and signifies whether the uptrend is nearing its end or not. The opposite of the Evening star is the morning star candlestick pattern, which consists of the bullish reversal candlestick pattern.
Evening star candlestick patterns as a technical indicator
Evening star patterns are present and associated with the top price trend. Technical analysts mainly use an Evening star to predict future price reversals to the downside.
Although it is pretty rare, the Evening star patterns are considered one of the most reliable and up-to-date technical indicators. These patterns can be seen in the different stock exchanges, forex trading, and indices at any trading platform.
Identifying an Evening star Candlestick pattern
Evening star patterns consist of three candlesticks,
- Large bearish candle
- Small bearish or bullish candle
- Large bullish candle
Large bullish candle
The first part of the Evening star candlestick pattern is a large green candle. On the first day of the execution of this pattern, bulls are in charge, and new highs are usually made.
Small bearish or bullish candle
The second day begins with a gap up in the bullish. On the opening of Day 2, bulls are in control. They do not push the prices up. The candlestick at the start of day 2 is a bullish, bearish, or neutral type. On day 2, the bearish candle is a vital sign of an impending reversal.
Large bearish candle
The most critical and significant candlestick occurs on the third and the last day. It begins with a small gap down (a bearish signal) and bears to be able to press the rates and prices even further downfall, often eliminating the profit and gains seen on the first day.
Evening star Candlestick Pattern Formation
The Evening star pattern starts with a solid bullish candle pattern, followed by a relatively smaller-sized central candle.
Then there is the third candle with a solid bearish candle which will close beyond the halfway point of the first candle.
The general representation of the candles is the most important within this formation, and the wicks or shadows within the formation are lesser essential.
From the action price standpoint, the initial bullish candle shows a strong momentum within the exchange price market, followed by a neutrality period by a smaller body of the small middle bullish candle.
The middle candle is often called a Doji candle or a spinning top formation. However, there is no certain compulsion for the middle candle to be of either type.
The figure shown below gives a formation of a candlestick pattern:
How does the Evening star pattern work?
According to the above figure, a decisive price move occurs to the downside, reflecting a profit and noticeable shift in sentiment, likely leading to a further price decrease.
You will notice that the final third candle within the formation opens as a gap down the price move. When this part occurs, it is indicative of the increased supply in the market, further confirming the bearish stance.
The Evening star candlestick pattern can be frequently seen on the price charts; however, the best formation will generally be those that appear at the top of an uptrend. Therefore, these formations will be considered the most reliable types of Evening star formations.
Traders with the candlestick patterns will recognise the Evening star patterns as having the opposite structure to the morning star candlestick pattern.
A simple way to understand the working of an Evening star pattern is that the form reflects a battle between the bears and bulls, wherein the bears take control of the whole currency trade market.
Resistance in Evening star Candlestick pattern
Now, you have a quick and thorough understanding of the structural elements of the Evening star candlestick pattern. After a prolonged price move to a higher part within an uptrend, this formation can generally be seen.
It is not always good to fade an existing trend, mainly when there is continued solid momentum behind a price move. A way to resolve this is by looking for the Evening star candlestick formation within an area of resistance.
Resistance can be formed in many different forms, a swing high, a Fibonacci level, a psychological round number, etc.
Any of the above will work well with the Evening star pattern formation. Let’s illustrate the Evening star pattern formation in context with the uptrend of the currency market and where a resistance level is being formed.
The above price chart displays the daily price of the action for the Euro FX contracts. You will notice that at the starting point at the bottom left, the prices are moving higher with every iteration in the currency market, and the majority of the candles that are seen are bullish green candles. There is no absolute denying that this currency market is trending at the top.
After some iterations, you can see that the significant engulfing pattern thwarts the upward prices of the currency market from the move, which causes the prices to back off and retrace to lower costs.
From this point, the prices tend to consolidate and move sideways. A clear swing in the high resistance level can be recognised. This resistance level can be seen near the top of the currency price chart by the red horizontal chart.
In the latter half of the chart, the Evening star candlestick pattern completes as the prices tend to move higher toward the resistance level. The completed Evening star pattern can be seen within the yellow circled area.
As the Evening star pattern completed, prices began to trade at a low quite sharply. This example illustrates the power of combining the candlestick pattern analysis with the traditional price action.
Evening star candlestick pattern with Relative Strength Index (RSI)
Another application of the Evening star candlestick reversal pattern is combined with the relative strength index indicator (RSI). The RSI indicator is an indicator of momentum that is useful and powerful in gauging the extent of a price move.
It can tell us whether the market is overstretched, overpriced, and has lately become oversold in case of a price move or one that has become overbought in case of a bullish price move.
The default looks back on the relative strength index indicator is 14 periods. An overbought condition occurs when the hand registers a reading below 30. The market can be considered an oversold entity.
Let’s look at the price chart below for the Gold and look at the Evening star pattern chart when the relative strength index indicator is in action.
In the chart, starting from the far left, you can see that the prices are moving up in a staircase manner. The prices in the chart, in other words, are creating a series of impulsive price moves up, followed by corrective price moves lower. It is, moreover, quite evident that the general trends of the market were up.
The relative strength index indicator tended to rise during the higher price sequence. It is an indication of a strong bullish price trend.
But towards the peak, we see that the Evening star candlestick reversal pattern is formed on the price chart. This can be seen in the area represented within the yellow circle.
We can see the RSI indicator reading as the candlestick method was completed. Notice that when the Evening star pattern was nearing its completion, the RSI indicator reading had emerged into overbought territory, exceeding the high threshold of 70.
This would provide an excellent opportunity to short the market price and trends immediately after the Evening star formation is completed.
Even though the consolidated prices are a bit after the pattern completion, the prices are ultimately moved lower as you would have anticipated.
Evening star Candlestick trading strategy
Now let us discuss the strategies behind a successful and emerging Evening star candlestick trading pattern. This strategy is a simple yet effective method for trading using the Evening star candlestick signal.
The pattern works on all time frames across most liquid instruments. However, you should be able to notice that the higher time frames, such as the daily and weekly tend to work more efficiently and manage to perform the best using this strategy.
Using this methodology markets that display means reversion characteristics tend to outperform the price currency market.
If you see an Evening star candlestick pattern, you will know that the uptrend has ended, and the only now available way is to sell your order. However, you will need to wait until the first bearish candle is formed completely. Therefore, your trade entry should be at the closing price of this respective bearish candle.
This strategy uses and incorporates three simple elements. First, you will have to confirm the presence of the Evening star formation pattern on the designed chart. Secondly, we will be looking for the formation of the Evening star candlestick method that occurs near or at the resistance level.
And lastly, you have to utilise the 50-day simple average moving within the strategy. Under most circumstances, traders usually use the 50-day SMA as a filer for future trends and trade only in the direction of the more significant and larger trend movement.
Since the Evening star candlestick method is a reversal pattern, you will have to take only small and sort trades with the technique and strategy. Here are some rules
- An Evening star pattern must be visible and present on the price chart.
- The Evening star pattern must occur near or at the resistance level.
- The Evening star pattern must complete 50-day SMA accordingly.
- A short position must be entered on the open of the following candle once all the related criteria have been met.
- A stop-loss would be placed above the highest level within the Evening star formation.
- The profit level will be based, entirely on Evening star pattern formation, from high to low. The target will be set twice the entire Evening star formation length.
As you can see, these defined rules are pretty simple and understandable to the layman trader but do not let this simplicity fool you. It is a practical, robust trading strategy that works very well given the right and effective market conditions.
Regarding this strategy, one thing to note is that some conservative traders may want to scale out of their positions rather than hold for the entire two-to-one risk to reward ratio.
Once you recognise the entire completed Evening star candlestick forex currency method, you can prepare yourself for a short or large-scale trade in no time.
The Evening star candlestick method is one of the most significant and most efficient patterns for the arsenal trade. A three candlestick formation occurs when a sustained price has moved higher.
Forex traders and stock exchange companies often use several other strategies. Yet, the Evening star candlestick pattern is the most thorough and up-to-date method to increase profit chances while doing trade.
Jason Morgan is an experienced forex analyst and writer with a deep understanding of the financial markets. With over 13+ years of industry experience, he has honed his skills in analyzing and forecasting currency movements, providing valuable insights to traders and investors.
Forex Content Writer | Market Analyst