Morning Star and Evening Star Patterns
The morning star and the evening star are the last two candlestick patterns we will be studying.
Before we understand the morning star pattern, we need to understand two common price behaviours – gap up opening and gap down opening. Gaps are a common price behaviour and occur when the stock closes at one price but opens the next day at a different price.
The Gaps
Gap up opening indicates buyer enthusiasm. For example, if ABC Ltd closes at ₹100 on Monday and announces great results, the stock may open at ₹104 on Tuesday without trading in between. This jump is called a gap up opening and portrays bullish sentiment.
Gap down opening indicates seller (bearish) enthusiasm. If ABC Ltd’s results are poor, it may open at ₹95 on Tuesday, creating a gap down. This portrays bearish sentiment.
The Morning Star
The morning star is a bullish reversal pattern that evolves over three days and appears at the bottom of a downtrend. It consists of:
- P1: A long red candle showing selling pressure.
- P2: A doji or spinning top with a gap down, indicating indecision.
- P3: A blue candle that opens with a gap up and closes above P1’s open, showing strong buying.
The psychology behind the morning star involves bears controlling the market initially, followed by indecision, and finally bulls taking charge with renewed strength. This shift encourages buying opportunities.
Trade Setup (Morning Star)
- Enter a long trade at the close of P3 (around 3:20 PM).
- Ensure P1 is red, P2 is a doji/spinning top with a gap down, and P3 opens with a gap up and trades above P1’s open.
- Set stop loss at the lowest low of P1, P2, and P3.
- Both risk-taker and risk-averse traders can enter on P3 itself.
The Evening Star
The evening star is a bearish reversal pattern that occurs at the top of an uptrend and also evolves over three days:
- P1: A long blue candle, showing buying strength.
- P2: A doji or spinning top with a gap up, indicating indecision among bulls.
- P3: A red candle that opens with a gap down and closes below P1’s open, showing sellers taking control.
The pattern suggests that bulls lose control and bears begin to dominate, encouraging traders to initiate short positions.
Trade Setup (Evening Star)
- Enter a short trade at the close of P3 (around 3:20 PM).
- Ensure P1 is blue, P2 is a doji/spinning top with a gap up, and P3 opens with a gap down and trades below P1’s open.
- Set stop loss at the highest high of P1, P2, and P3.
- Both risk-taker and risk-averse traders can enter on P3.
Entry and Exit Summary
- Risk-taker: Enter on P3 around 3:20 PM after validating pattern rules.
- Risk-averse: Enter the day after P3 with a confirming candle (blue for long, red for short).
- Stoploss: Lowest low of the pattern for long trades; highest high of the pattern for short trades.
As a rule of thumb, the more candles involved in a pattern, the more confident you can be entering on P3 without waiting for confirmation.
What Next?
We have studied 16 candlestick patterns, and while there are many more, knowing a few well is often better than trying to memorize them all. The real value lies in understanding the psychology behind these patterns.
Much like driving a car, once you understand candlestick behavior, you don’t need to remember every pattern. You develop the ability to respond appropriately based on price action. Focus on mastering the patterns discussed so far, and over time you’ll develop confidence to trade based on deeper market understanding.
Key Takeaways
- Star formations occur over three trading sessions with P2 typically being a doji or spinning top.
- If P2 is a doji, it’s called a morning doji star or evening doji star; otherwise, it's a morning or evening star.
- Morning star: Bullish pattern at the bottom of a downtrend. Enter long on P3 with stoploss at the lowest low.
- Evening star: Bearish pattern at the top of an uptrend. Enter short on P3 with stoploss at the highest high.
- Star patterns are strong enough to justify trade entry on P3 itself for both risk-takers and risk-averse traders.
- Candlestick patterns reflect market psychology—developing this mindset is more valuable than memorizing patterns.