Evening Star Pattern
In this article
The evening star pattern is a candlestick pattern that appears at the end of the uptrend, signalling a downward trend.
Meanwhile, The Morning Star is a pattern of candles that appears at the end of a downtrend and signals an upward turn. Entrepreneurs need to be aware of these different trading patterns, and Evening Star is an important part that needs to be addressed.
When the Evening Star signals that the uptrend is over, it looks like a red flag to South African traders, signalling that it’s time to disclose earnings.
In this blog, we will understand the Evening Star model’s origins and explain how you can trade it correctly.
What is the evening star pattern all about?
The evening star candlestick pattern is a pattern of a stock price chart. Technical analysts use it to determine when the trend will change. It is a bear pattern candlestick and consists of three candles:
- big green candlestick
- small candle
- and a red candle
The first part of the evening star pattern is a large thick green candle. The light bulbs finally hit the first day and often reached new heights. The next day begins with a bullish difference. From the beginning of the second day, it was clear that the bulls had everything under control.
However, they did not increase the price. Candlestick on day two usually is small and can be robust, bearish, or neutral.
What does the evening star pattern say?
The Evening Star pattern is a valuable tool for technical analysts because it can predict South African market sentiment and changes in price dynamics. The Evening Star pattern consists of three candles, one each day. On the first day, the price of assets stood with solid dynamics.
This momentum weakened the next day, and the star candlestick appeared. The next day, many scepticisms arose among the bears and bulls. However, if the market opens in the hole on day 3, it is a sign that momentum is returning, indicating that traders are taking a short position.
If the price on day 3 is relatively short, the pattern of the evening star is confirmed. The small body shows that there is a balance between buyers and sellers. The star signal weakens the momentum created by the previous candle.
How does the evening star pattern work?
A candle pattern is a way of presenting specific information about stocks. Specifically, it represents the open, high, low, and closing share price in a given period.
Each candlestick consists of one candle and two candles. The length of the candle is a function of the range between the highest and lowest price during the trading day.
A long candle indicates a significant price change, while a short candle indicates a slight price change.
In other words, long candle bodies indicate strong buying or selling pressure depending on the direction of the trend, while short candles indicate little price movement. The evening star pattern is considered a strong indicator of future price declines.
The main characteristics of the evening star pattern
Visually, the star appears in the evening on top of the mountain. It has a bull and bear candle on both sides of the body of a small candle and is recorded after three consecutive South African trading sessions. It has the following features:
- There are three rows: a large white candlestick, a small body candle, and a red candle.
- Tall white candle: The first candle in the pattern comes from buying pressure from light bulbs. This represents an increase in prices and will be shown in the first session.
- Small candle: The next day, the price may continue to rise, but it will disappear compared to the tall white candle on the first day. This candle is usually called a doji candle and means that there are no buyers or sellers who would prefer a profit.
- Medium-sized red candle: On the third day, prices will rise more than on the second day, but on the first day, they will not reach purchasing power. This candle typically opens in the middle of the second candle and closes in the middle of the first. The gap between the bodies of two candlesticks: This makes a star and signals that momentum is slowing down.
- Just follow the uptrend: The Evening Star is a pattern of change that predicts the expected downtrend. As such, it can only be seen after an upward trend.
How can you identify the evening star pattern?
Identifying the evening star on the charts involves identifying the three main candles. First, you need to understand the past price action and where the pattern originated within the current trend.
- Set the current uptrend: The market should have higher highs and higher lows.
- The Big Bull Candle: The Big Bull Candle results from tremendous buying pressure and the continuation of the current uptrend. At the moment, traders should only look for long trades because there is still no evidence of change.
- Little Bear / Bull Candle: The second candle is small – sometimes a Doji candle – representing the first sign of a tired uptrend. Usually, this candle has a longer distance because it makes it taller. But, again, it doesn’t matter if the candle is a bear or bull because the main reason is that the market is relatively indecisive.
- Big Bear Candle: This candle reveals the first real sign of new selling pressure. In non-Nefex markets, this candle has been flowing since the closing of the previous candle, announcing the beginning of a new downward trend.
- Another price action: After a successful turn, traders will observe lower highs and lows, but they should always manage the risk of a failed move with well-placed stops.
How can you interpret the patterns of the evening star?
Note that no pattern, including the evening star, is always 100% accurate. And it should be analysed with South African market trends and context, but when an evening star appears here, there are some good moves.
- Securities sales: An evening star means prices will go down, which is an excellent signal to sell.
- Entry Point: You can use the evening Star to predict a cheaper entry point for a typically strong stock.
- Short Stock: This technique is complex and should not be tried by a new trader. To cut stocks, you want to borrow a lot of stocks from their owners. Then sell those shares openly. With the profit you earn, you pay the owner and buy the shares at a price lower than what you know from the upcoming downtrend.
Steps for trading an evening star pattern
There are seven steps in this evening star trading candle pattern. These include setting the correct time frame on the chart, evaluating open, high, and closing prices, RSI levels, reducing the time frame, selling short, determining a temporary loss, and taking revenue. These are listed below.
1. Set the correct graph time frame
The time frame is an essential factor influencing the marketing strategy. Investors can adjust the timing to suit their needs. However, this should be verified by paper marketing to test the assumptions.
2. Evaluation of open, high, low, and close prices
Daily candle charts are a reflection of such prices. It shows opening and closing prices and high and low prices. The candle’s body appears first, while the shadows and candles appear later.
3. Analyse RSI prices
The RSI level should be checked regularly. Traders usually believe that if the daily RSI exceeds 70, it is a direct signal of an overbought signal.
4. Reduce the time frame
In recognition of the overbought conditions, the RSI brand has exceeded 70. The most common time frame used for such designs is the five-minute candlestick chart. This is because the trade is not too fast or slow.
5. Short sale
A short sale means when you borrow and sell stock shares. Hence, the trader borrows at a high price and expects a significant price reduction in such a process. Under this assumption, the shares are purchased at a lower price to repay the broker.
This method is used by investors when there is a market with a downward trend. However, a shortening strategy is not recommended for new investors.
6. Stop the loss
The stop loss is called the preset exit price if the trader makes a mistake. This can be determined in the slip process. This applies to a situation where prices are too fast, then the percentage of investors may fall, and it may pass.
It is essential to set a goal before predicting a company’s profit or loss. Therefore, the investor should pay attention to the evaluation and setting of achievable goals.
How to improve the reliability of evening star patterns when trading?
Each candle pattern should be used in combination with other indicators. For example, here’s how you can make an evening star more believable.
- RSI: The relative strength index is an essential indicator of any pattern. An evening star is a short-term understanding of what could be of long-term benefit to you. It is not a good idea to use a three-day model to evaluate the performance of securities in future years. Instead, use RSI to see how stocks perform in the long run.
- MA: The MA or moving average can observe constant changes in a particular security by ignoring small price fluctuations that can skew the data. There are several ways to calculate the moving average, but it should be noted that the MA works best in a market that follows trends, unlike another market.
Differences between morning and evening star pattern
The morning star and evening star patterns are that the morning star is considered a bull indicator, while the evening star is considered a bear star.
The morning star has a half candle (second candle) with a high peak above the first and third candles, while the evening star has a half candle lower than the first and third candles.
The morning star appears below the bear’s declining trend, which signals a bullish reversal, while the evening star appears above the bullish uptrend, which signals a bear’s reversal.
What are the benefits of trading evening star patterns?
Here are the main benefits of selling an evening star pattern:
- This makes it easier to predict potential market changes
- It is one of the easiest to find and identify patterns
- It can be used in many different business strategies
Limitations of Evening star pattern
Selling just by finding an evening star on your card can be very risky. An evening star was seen in a place you think maybe the culmination of an upward trend does not mean that solid momentum is over.
A larger time frame and volume best support a morning star because it repeats a known and respected resistance level.
Related Questions (FAQ)
1. What does the evening star doji mean?
Tonight, Doji Star acts as a bear reversal of the rising price trend as the price rises and falls in the pattern. The declining puncture occurs when the price closes below the lower edge of the three candle pattern.
2. Are evening stars strong?
Evening star patterns are associated with a peak in price growth, which means the upward trend is ending. The opposite of the evening star is the pattern of the morning star, which is considered a bull indicator.
3. What is the difference between Morning and the Evening Star?
The half-star of the morning star evoked a moment of scepticism in the market, where the bears began to give way to the bulls. The third candle confirms the change and may indicate a new upward trend. The opposite pattern of the morning star is the evening star, which means a reversal of the downward trend.
To conclude the discussion, the Evening Star is a candlelight pattern that appears at the end of the uptrend, signalling an upward trend.
This is a pattern of a bear candlestick consisting of three candles: a large bull candlestick, a small body candle, and a bear candle. The Evening Star pattern always appears on the charts and represents a good order of input and output levels.
The signal confirms if the evening star pattern is supported by numbers and other technical indicators, such as the resistance level.
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