Traders have been using candlestick charts for ages. For the first time in the 17th century, A Japanese merchant called Homma observed that while there is a relationship between price, supply and demand of a commodity, dealers’ emotions usually dominate the market. Candlestick patterns help traders to anticipate price movement based on historical trends. This piece will discuss one of the most effective candlestick patterns called Morning Star in detail.
What Is Morning Star?
A morning star is a three candlesticks pattern usually perceived as an early indication of a bullish trend. A morning star occurs downward, signaling the start of an uptrend. In simple terms, you may anticipate a price trend reversal when you see a morning star. Traders confirm the trend reversal after spotting a morning star using other indications.
Characteristics of Morning Star
For optimal accuracy, the reversal pattern of the morning star should emerge at a critical support level or near the bottom of a downtrend. To illustrate this point, consider how the financial market swings in a zigzag fashion.
Reversal of a swing level indicates the end of the current trend and the beginning of a new one. The formation of the morning star follows the same logic.
Buyers actively speculate on the price on Day 1 for this pattern. After a downward gap on Day 1, aggressive sellers become active. The sellers narrowly make a new low, indicating a loss of momentum at the end of the day. That is the crucial morning star pattern indicator. After two days of bearish market activity, a powerful bullish candle develops on day three.
The above graphic depicts the morning star formation on a pricing chart. The third day begins with a bullish outlook and ends above the second day’s close. The pattern’s shared features include:
- When a morning star pattern appears on a downtrend’s bottom, it’s a bullish morning star.
- Morning Star formation near a solid support level is more likely to function.
- The pattern is more robust if the third day’s candle is more significant than the first day.
- The second day should have a bearish gap, whereas the third day should have a bullish gap.
What Does A Morning Star Tell You?
Since a morning star is simply a visual pattern, no computations are required. The morning star has a low point on the second candle that becomes visible after the third candle closes. Technical indicators like the relative strength indicator (RSI) suggesting an oversold stock or price action reaching a support zone might help analysts forecast the formation of a morning star.
The chart above is in black & white, although red and green are more popular candlestick colors. However, the morning star’s central candle holds more significance since it can be black or white. Sometimes, it could also appear red or green as the session progresses and the buyers and sellers level out.
Morning Star Example
Traders may use the morning star pattern to visually signal a trend change from bearish to bullish but with other technical indicators backing it up as well. Not to mention, pattern creation is also affected by volume.
On the third day, traders want to see volume increase steadily. Regardless of other signs, candle printing’s significant volume on the third day confirms a pattern (and an uptrend). Traders will likely take on a bullish position when the morning star pattern develops on the third day and hold them until an anticipated reversal.
Doji Morning Star VS the Morning Star
The formation of morning star patterns may sometimes vary. A Doji appears when a candlestick exhibits a flat middle price movement. It’s a minor candlestick with no wicks, resembling a Plus symbol. Unlike the morning star having a thicker central candle, a Doji morning star suggests market indecision more reasonably.
Because more traders may see a morning star developing when a Doji follows a black candle, the volume spikes, and the white candle lengthens.
Morning and Evening Stars’ Dissimilarities
The morning stars and evening stars are opposite of one another. Starting with an enormous white candle and ending with a smaller black or white candle is typical. Then the black candle should be at least half the length of what came before it. It is time for bears to take over since the evening star signals an end to an upsurge in the stock market.
Limitations of Morning Star
Like other candlestick patterns, the Morning Star has a few limitations, listed below.
- On a chart, the morning star comprises three candlesticks. You might miss a trade if the price reverses the trend before three days.
- You can’t rest assured of mobility. Despite following all the guidelines, you may hit the stop loss.
- Finding the setup on the charts takes time and patience, especially for D1 or W1 time-frames.
- In turbulent markets, getting shut out at breakeven is more likely.
The formation of a valid morning star indicates a bullish reversal after a long bearish trend. Although the morning star pattern is highly profitable, traders should thoroughly analyze it and practice on a trial account. Also, traders should not forget to assess the market’s risk. A market collapse or a dramatic rising or negative trend may happen quickly. Remember that even the most flawless candlestick formation cannot forecast the future. Always corroborate chart patterns using trade volume, other technical indicators like the RSI (Relative Strength Index), and a few more.
For more details, please look into Traders Central’s wide range of educational resources since we cover everything from forex to stock and crypto markets. We also provide funding solutions to skilled traders.