Notice that during the entire price sequence higher, the RSI indicator was rising. But towards the peak, we can see that an Evening star reversal pattern formed on the price chart. Just as this reversal candlestick pattern was completing, we can take note of the RSI reading.
This would have provided an excellent opportunity to short the market immediately following the completion of the Evening star formation. Even though prices consolidated a bit after the pattern completion, the price ultimately moved lower as we would have anticipated. Resistance can come in many forms such as from a swing high, a psychological round number, a Fibonacci level and more. Let’s illustrate the Evening star formation that occurs in the context of an uptrend and where a resistance level has formed. The Relative Strength Index combined with the Evening Star Candlestick Pattern, helps traders identify overbought
levels in the market.
How to Trade Forex Using the Evening Star Candlestick Pattern – Strategies and Examples
In this article, we will cover how to identify, interpret, and trade currency pairs with the evening star pattern. By the end, you’ll be able to apply the evening star to the forex markets in real-time. You can use the historic price action and analyze the structure and behaviour of the morning and evening star patterns on the Metatrader 5 trading platform, which you can access here. We previously mentioned that the third reversal candlestick of the evening star pattern often shows an increase in volume. Using the same chart example as before, we added the volume indicator to illustrate this behaviour.
However, in markets outside of forex, such as in stocks, gaps occur more frequently. The 3rd one ideally (but not necessarily) traces a bearish gap with a large red body. In this final example, a target was again placed at a level that offered double the reward versus the initial risk. It’s advisable to consult various different technical indicators to predict price movements, as opposed to relying solely on the signals provided by one. Evening Star patterns appear at the top of a price uptrend, signifying that the uptrend is nearing its end. This indicates reduced risk of entering a failed reversal, since the pattern on its own does require confirmation.
Forex evening star – how to identify this candlestick?
Prices open higher by creating a gap compared to the previous day’s close. Their length depends on the range between the lowest and highest price over one trading day. This time we will be using the daily chart for the EURUSD currency pair. As you can see the rules for this Evening star trading system are quite simple. It is an effective robust trading strategy that works very well given the right market conditions. However, we will be using the 50 day SMA in a very different way than we would normally.
- These levels confirm traders about the reversal signal and place exit orders accordingly.
- It should be noted that the 2nd candlestick must obligatorily form a gap with the 1st, but between the 2nd and the 3rd candlestick, the gap is preferable but not obligatory.
- With this easy strategy, a target can be placed at a level that would allow you to profit twice as much than what you are willing to initially risk on any particular trade.
- This is because a long-term chart is a better depiction of the candlesticks and where the market
is supposedly headed, providing you with ideal reversal signals.
Traders that are familiar with candlestick pattern analysis will recognize the Evening star pattern as having the opposite structure to the Morning star pattern. The bullish version of the evening star pattern is the morning star candlestick. Technical traders consider the evening star a strong indicator of a price decline. You will spot large bullish candles on the first day, indicating price rise continuation.
How to interpret the morning star in trading?
Thus, many analysts argue that as long as these four conditions are met, it is a valid morning star pattern. It is important to note here that the second candle is the most important one. It can be bearish or bullish, as the focus is on indecisiveness and uncertain outcome as to which out of two sides will come out on top. Traders using the evening star pattern often wait for a bearish breakout to occur before committing any investment. The first must be green and powerful in the continuation of an uptrend. Ideally, the second candle should form an unfilled bullish gap with a small body.
The evening star is a chartist figure which announces a bearish reversal. Whatever the quality of the 1 st gap and the star, it will be better to wait for the end of the pattern and for the red body to form to initiate a position. You can spot this structure the day after a loss, following an uptrend .
Is the morning star better than the evening star?
First, we will need to confirm the presence of an Evening star pattern on the chart. Secondly, we will be looking for the Evening star formation to occur at or near a resistance level. And finally, will be utilizing the 50 day simple moving average within the strategy. The price chart above displays the daily price action for the Euro futures contract. Notice that starting at the bottom left, you can see the prices were moving higher, and where the majority of the candles can be seen as green bullish candles.