What Is Evening Star Candlestick Pattern? Meaning And How To Trade


The second day also shows a rise in prices but the extent of the increase is modest compared to the previous day. The third day shows a long red candle in which selling pressure has forced the price to around the midpoint of the first day. A candlestick pattern is a way of presenting certain information about a stock. It represents the open, high, low, and close price for the stock over a period of time. When using the Evening Star reversal candlestick pattern, pay attention to the second candle.

Not only that, but there is also an oversold RSI and bullish MACD crossover around the same level. Combined, these 3 signals would have given you a profitable exit from your initial short position. Firstly, you will notice that the evening star occurs after a long uptrend. So long in fact, that the RSI became overbought – a sign of bullish exhaustion. Moreover, the RSI began to fall before the share price did – another bearish signal known as negative divergence.

Traders also try to confirm the pattern with other technical tools, such as trendlines, resistance levels, and momentum oscillators, before placing short positions in the market. With this strategy, the exit method could be the use of a profit target, using technical indicators to signal a change in market direction, and setting a stop-loss order. The Evening Star candlestick is a three-candle pattern that signals a reversal in the market and is commonly used to trade forex. Correctly spotting reversals is crucial when trading financial markets because it allows traders to enter at attractive levels at the very start of a possible trend reversal.

One thing that seems clear from the research is that most day traders lose money . ” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). This pattern can be identified across different time frames, but its reliability increases on longer time frames like daily, weekly, or monthly charts. These extended periods tend to better reflect overall market sentiment and are less affected by the ‘noise’ that can distort shorter time frames, such as hourly or minute charts.

The market opens higher than the previous session’s close, yet the bullish momentum falters, reflecting uncertainty and a slowdown in momentum. Trading volume typically drops on this day, indicating a reduced commitment to the ongoing uptrend. The pattern’s third and final candle is crucial in affirming the reversal signal. As seen above, it’s a substantial red or black candle, emblematic of the reversal, closing significantly into the body of the first candle.

Combined with Stochastic indicator

Using the same chart example as before, we added the volume indicator to illustrate this behaviour. Candlestick charts offer valuable information to a trader that is visually easier to interpret than a bar chart or line chart, for example. Technical analysts closely watch candlesticks for well-known patterns that tend to repeat in all markets and timeframes. When the evening star pattern is backed up by volume and other technical indicators like resistance level, then it confirms the signal. Ultimately, the best indicators to use with the Evening Star candlestick trading strategy will depend on the individual trader’s strategy and trading style.

  • Therefore, traders use it to either sell an existing long position or enter a new short position.
  • Conversely, the morning star pattern usually appears at the end of a downtrend and represents a bullish reversal pattern.
  • The ADR means gives a better view of the general market mood and could help in deciding whether an evening star is worth taking or not.
  • Traders have their own preferences regarding what patterns to watch for when they want to detect trend changes.

The evening star suggests the end of an uptrend, prompting traders to either take profits or consider short positions. The morning star, on the other hand, indicates a potential bullish turn, inviting traders to go long or close short positions. In contrast, the morning star pattern signifies a potential end to a downtrend, offering a ray of hope for the bulls.

What does the evening Doji star tell traders?

The first part of an Evening Star reversal pattern is a large bullish green candle. Leveraged trading in foreign currency or off-exchange products on margin carries significant risk and may not be suitable for all investors. We advise you to carefully consider whether trading is appropriate for you based on your personal circumstances.

Now, knowing why the market moved as it did, or why, is almost impossible. However, trying to figure it out is a great exercise in coming up with ideas for trading strategies and improving your understanding of the markets. The heikin ashi is a Japanese candlestick-based charting tool that is a more modulated version of the traditional candlestick charting… Here is a foolproof explanation of the evening star pattern and its guidelines. It’s important to note that the Evening Star pattern is more reliable if the gap between the first and second candles is significant.

What is Evening Star Candlestick Pattern?

We need additional filters or conditions to validate the signal, and remove a lot of bad trades. In addition to this, it’s important to use the evening star with the right timeframe and market. We recommend that you use backtesting to ascertain the best markets and timeframes for the pattern.

Evening Star Pattern – Formation, Example, Pros & Cons

These occurrences were enough to classify this evening star pattern as valid although the entire pattern does not look exactly like a picture-perfect example. As a novice trader, it is important to educate yourself as much as possible if you wish to become consistently profitable in trading. Understanding candlestick patterns and what they tend to forecast is an important part on your personal trading journey. This indecision candlestick pattern helps the traders to give a red flag and thus prevent further buying.

Understanding Risk Reward Ratio: The Key to Profitable Trading

The pattern is also more reliable if the bearish third candle is longer than the first candle. Eventually, Tesla’s stock (TSLA) hits the investor’s target, leading them to close their position and secure profits. Had the investor been evening star doji more aggressive, they might have chosen a trailing stop loss to capitalize on further downward movement while protecting their gains. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.

Pros and Cons of the Evening Star Candlestick Strategy

Then we know that the market has moved a significant distance to the upside. With the evening star, we might choose to only take a trade if the market has entered overbought territory, meaning that it has moved excessively to the upside. As the bullish trend uncovers, most market participants are bullish and believe in the continuation of the bullish trend. As such, they’re long in the market or may decide to get in if they’re still flat.

It does so by comparing the prices of put and call options, which vary with the market’s expectations of future price moves. The ADR means gives a better view of the general market mood and could help in deciding whether an evening star is worth taking or not. As a result of the constant growth in the crypto industry with the first emergence of Bitcoin and Ethereum, traders…

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