The Morning Star and the Evening Star
The morning Star and the Evening Star formations are patterns made of three candlesticks. The original candlestick patterns were made on the Japanese rice futures trading and were created for daily timeframes. Thus, they could depict gaps from the previous close to the next open. The Star was a small real body – white or black – that was gaping away from a previous large body. The only place where that could occur in the Forex markets is during weekends. Thus, what is required to form a star in Forex is a small body, the smaller, the better, at the end of a large body, preferably with large shadows.
The Morning Star
The Morning Star is a three-candle formation at the bottom of a descending trend. In astronomy, Mercury is the morning star that foretells the sunrise and the arrival of the day. That was the name the Japanese gave to the formation, as they consider it to be the precursor of a new uptrend.
As said, it is formed by three candlesticks. The first one is a large and black candlestick. The session day the price starts with a gap down (or just at the close in Forex) continues moving down for a while, then it recovers and closes near the open, creating a tiny body. The third day is a white candlestick that closes near the open of the first black candlestick. The important factor in the signal is the confirmation of buyers after the star candle is formed. The close of the third day should, at least, cross the halfway up to the black candle body, as in the case of a piercing pattern.
Chart 1 – Morning Star on the DAX-30 Index (click on it to enlarge)
Criteria for a Morning Star
- The downtrend was evident
- The body of the first candle continues with the trend (black)
- The second candle is a short body figure showing indecision
- The third day the candle closes at least above 50 percent the body of the black candle.
- The larger the black and white candles, the better.
- A gap is desirable but doesn’t count on it on 24H markets
- A high volume in the first and third candles would be good signs of a selloff and consequent reversal.
As in most bullish reversals, the first day, the hopeless bulls capitulate with a significant drop and substantial volume. The next day the power of the sellers stops in a short-bodied candle. The third day began bullish, touching the stops of the late short-sellers, and also caused by the close of positions of profit-takers. That fuels the price to the upside, making more short sellers close their positions -buying- and pushing up further the price. At the end of the day, buyers take control of the market action closing with a significant white candle on strong volume.
The Evening Star
The Evening star is the reciprocal of the Morning star, and even more so, when trading pairs in the Forex market, or any pair, for that matter. In this case, the Japanese linked this formation with the Venus planet, as the precursor or the night. It is created when a long white candle is followed by a small body and a large black candle.
As the case of the Morning Star, a gap up on the second small-bodied candle followed by a gap down on the third black candle is further confirmation of a reversal, but that seldom happens in the Forex Market. Also, the third candlestick is asked to close below 50 percent of the body of the first white candle.
Chart 2 – Evening Star on the EURUSD Pair (click on it to enlarge)
Criteria for an Evening Star
- The upward trend has been showing for some time
- The body of the first candle is white and large.
- The second candlestick shows indecision in the market
- On the third day, it is evident that the sellers have stepped in and closes below 50 percent of the initial white candle.
- The longer the white and black candles, the better
- A gap before and after the second candle is desirable, although not attainable in Forex.
- A good volume in the first and third candles is also desirable.
The uptrend has attracted the buyers, and the last white candle has seen an increasing volume. In the next session, the market gapped of continue moving up for a while, catching the last stops by short-sellers, but suddenly retraces and creates a small body, with the close next to the open. The next day there is a gap down makes the stops of the long positions to be hit, adding more selling pressure to the profit takers and short-sellers. The day ends with a close that wipes most of the gains of the first white candle, that shows that the control is in the hand of sellers.
Reference: Profitable Candlestick Patterns, Stephen Bigalow