I always describe markets as a battlefield… And the evening star candle pattern (also called evening star or evening star) is absolutely related to a battle.
On the battlefield, preparation is key. The story begins in feudal Japan about 450 years ago. One of Japan’s three great generals, Oda Nobunaga, is attempting to wrest control of the fertile rice lands from his enemy. A strong local defensive position and 3 rivers stand in your way. If Nobunaga wants to win, his army must cross the rivers. Once they do, the battle will be on their side. But if your army can’t cross the rivers, it’ll be a bad sign. The army finally manages to cross the 3 rivers and wins the battle. He gets control of new land and more rice, Japan’s strong currency at the time. His legend grows. Well, let us move on to this day…
The Battlefield of the Stock Market
The scene: A stock trader looking at his screens, looking for the perfect time to close a long position. Will the stock price continue to rise? Or will there be a bearish turn? If the bulls finally win the battle, the trader has the option to hold the position for more winnings, like Nobunaga winning the battle in ancient Japan. But if the bass players win, then it’s time to close the position and leave. A sign appears on the chart opposite the trader: the evening star candle pattern of three rivers. The trader knows that the chances of overcoming resistance are slim. Goal met. It’s time to step out of position. The merchant places a sales order. Moments pass. The order is executed and the merchant leans back, grateful for having studied the patterns. Does it seem too dramatic?
In my opinion, learning patterns are a key basis for learning to operate. The names of Japanese candle patterns hint at emotional confusion and refer many times to legends. It makes them more attractive to learn. But they go beyond names and stories. As a trader, learning these patterns will teach you about the psychology of the market. The battle between bulls and bears is psychological. Arm yourself well and you can be victorious. But not understanding the patterns could mean the end of your career as a trader or investor.
What is the Evening Star Candle Pattern?
An evening star candle is a turning pattern. This means that the momentum of a recent trend is slowing down. The evening star candle pattern is a bearish reversal. The upward momentum, controlled by the bullies, begins to lose strength. The star is a period of equilibrium between bullish and bearish with little price movement. Then the momentum changes and the bearings take over.
The first candle has a long body and is bullish: the price closes at a higher price than opened. In this case, in the pattern of stars of the night, there will be a gap until the second candle. This is the star.
The star signals a slowdown in momentum. It has a short body (called spinning top) or none (called Doji). It can be green or red. The most important thing we have to understand is that there is a balance between buyers and sellers.
The third sail is bearish: the opening price is higher than the closing price. The ideal evening star opens from the star to the third candle. The third candle ends abruptly in the body of the first candle.
Note: In the case of the evening star pattern, you should pay more attention to the candle body than to the shade. Shadows are the lines that extend above and below the body of the candle. They represent the trading range of that period. The candle body means the prices between opening and closing. A higher closed green candle that was opened. A red candle closed below the level it opened.
Knowing the Morning Star Pattern
The so-called morning star pattern is precisely the opposite of the evening star candle pattern. We’re talking about a reversal pattern that indicates the shift from a bearish to a bullish trend. As we have seen with the pattern of the evening star, we must detail the existence of three candles with the central sail with a long shadow down that has been bought by the bullies. The third candle is the confirmation candle of the upward turning pattern. Do you want to see the morning star pattern along with a higher volume? It is also a more convincing pattern if it occurs around a support level.
How does the Evening Star Pattern Work?
As I said earlier, the evening star candle pattern is an indication of a trend change. The evening star pattern acts as a visual guide to what happens in investor sentiment. The evening star candle day is the day of indecision between the bulls and the bears. If the third day is a low gap, it may be a good indication to sell a long position. Or you might want to cut short to take advantage of the downward movement.
Benefits of the Evening Star Candle Pattern
All star patterns (yes, there are others, including the morning star pattern) are spin patterns. All represent a deadlock between sellers and buyers. The benefit for you as a trader is that they are predictable. A warning before we look at an example from real life: this is not an exact science. It’s based on experience and study, but that doesn’t mean it always happens. You need to study!
One more caveat: When you look at graphs over different periods of time, you may not see the same pattern.
I used a 1-minute candle in the chart example below. When I looked at the 2-minute candle for the same chart, the pattern was different. It was a bearish wraparound pattern, another spin pattern. It confirmed what I was seeing on the 1-minute candle chart.
What we need to learn from using different periods of candles: perspective can make a big difference in action charts.
Example of Evening Star Pattern
The classic evening star candle pattern has a space between the first and second candle bodies. An ideal night star would also open between the second and third sail bodies. Steve Nison, the creator of the book “Japanese Candlestick Charting Techniques”, clarifies this point in his book. Nison brought Japanese candle graphics to the West. The book is a classic and it is well worth spending time with it if you want to better understand candle graphics.
Three White Soldiers and Black Crows
Three white or green soldiers is a bullish sail pattern. It is used as an indication of a reversal after a bearish trend on a chart. The figure of the three soldiers is a long-bodied candle attainment green or white. They open inside the body of the previous candle and close above the closure of the previous candles. There are usually no long shadows on the sails. The opposite of this pattern of candles is the three black crows. They indicate a reversal of an upward trend.
Three “Inside Up and Down”
Three “Inside Up and Down” is another turn pattern. We might be seeing the reversal of an uptrend or bearish trend. This pattern requires three candles to appear in a specific sequence. In an upward trend turning downwards will be a long green or white candle, then there will be a short red or black candle that closes and opens within the same body of the first candle. The third candle shall be a black or red candle that closes below the closure of the previous candle. In a bearish trend chart that is reversed upwards, the sails will be the opposite.
Importance of Action Indicators
Many traders use technical indicators along with patterns. Combined they can provide powerful information to set up your trading plan. One of the most popular indicators together with the evening or evening star candle is the relative force index (RSI). The RSI indicator measures the momentum to determine if a stock is overbought or oversold. Overbought or oversold conditions, measured by the RSI, indicate a likely turn. There are two reasons to use the RSI with the evening star pattern. Initially to see the daily levels of the RSI indicator in an overbought condition. Then, once you change the timeframe (step #4 below), use RSI to confirm the reversal.
The Evening Star Candle Pattern in 7 Steps
Let’s put this in perspective. If you spend time looking for evening star candle patterns to operate, you might be waiting until it runs. It’s a pattern that doesn’t always sweat. It is very positive to be able to recognize it and even have a plan prepared for those occasions when you see it.
#1 Set the correct chart timeframe: Setting the right timeframe depends largely on your trading strategy. You can (and should) change the deadlines I give you to adapt them to your strategy. You should practice paper trading to prove your thesis. For the sake of understanding the technical analysis of evening stars, imagine you are looking at a longer-term graph. Let’s think we’re talking about a one-year chart with a day candles. You are starting with the longer-term chart to get a general idea of the price action.
#2 Know the opening, maximum, minimum, and closing prices: If you look at a chart with day candles, you’re essentially doing this. You are looking at the daily opening and closing prices (the body of the candle) and the maximum and minimum prices (the shadows or wicks).
#3 Wait until the daily RSI exceeds 70: Many operators consider that a crossing of the RSI above 70 is a clear sign of over-purchase. It is a common strategy used by currency traders.
#4 Reduce the time frame: Once the overbought condition has been identified, with the RSI indicator having a value greater than 70, long-term chart, it’s time to zoom in. A common timeframe for this is the five-minute candle chart. Many traders like it because it is neither too fast nor too slow.
I want to reiterate the difference in graphics when I look at different time frames. While degrading the time frame to the five-minute graph is one way to play this, it’s not an exact science. Remember, RSI is calculated using a certain number of periods; 14 is the most common.
#5 Short sale: Short selling is the option to borrow to sell assets. You can borrow at a very high price and wait for the price to go down. Assuming the price drops, you buy shares at a lower price to return the shares to the broker. This is how some traders approach a market with a bearish trend or a stock with a bearish trend.
Warning: I do not recommend opening shorts for novice traders. It is a risky and difficult strategy. He could get caught in a short lock. That said, let’s look at how the evening star pattern can indicate a bearish reversal and a potential short play. Watch the stock price action you want to sell short. Depending on the time period you are using, watch for actions to rise and the star to appear. But don’t come in when you see the star.
Because first, he wants to confirm the turn. Again, opening shorts is a very risky strategy. You need access to shares for short. All brokers do not have to have the shares to borrow them. You should make sure you have the knowledge action you are performing. Have a plan. Therefore, you should make sure you can find actions short. Then wait until the third candle confirms the pattern. Then the question is to sell and wait for the price to go down.
What can we do if the price reversal does not work as we expect? Follow my rule number one and cut the losses quickly. When you cut short, you lose money if the stock price goes up above the entry price. That’s because he pays more for the actions needed to close his position.
#6 Put a Stop Loss: A stop loss is your preset exit price if the operation goes wrong. You can set electronically established loss limits, but I’m not a big fan of doing this. I put a mental stop. If the price moves too fast, you can go long to your stop loss. This is called sliding. If you use a mental stop-loss, you can customize it. You can find the best price available to buy stocks and close your position. If you are in a short position, the stop-loss must be higher than the entry price. Assuming that everything is correct, at what point do you close the position? Many traders claim that it is convenient to wait until the RSI indicator drops to a level below 30. I would prefer you to have a clear negotiation plan and stick to it. That may or may not involve further use of RSI.
Now is the time to…
#7 (hopefully) Take advantage of your winnings! If your operation went well, enjoy the reward. Set your target before trading. I often aim at 10%, 20%, or 30%. Those trades add up. Remember, my results are unusual. Trading is risky. Keep in mind that you may lose money. Do your own research and never risk more than you can afford to lose.
The evening star pattern indicates a shift from bullish to bearish. Traders who detect this pattern can use it to determine when it is time to exit long positions or enter short trades.