Evening Star Pattern: What It Is, What It Means, and Example Chart

evening star candlestick

The evening star pattern isn’t the only bearish indicator despite its popularity among traders. Other bearish candlestick patterns include the dark cloud cover and the bearish engulfing. Traders have their own preferences regarding what patterns to watch for when they want to detect trend changes. This formation is thought to indicate that the buying pressure is succumbing to selling pressure, hence signaling that a peak has been reached.

  1. Consisting of three candles, the pattern usually forms at the end of an uptrend, suggesting a possible downturn in the market.
  2. This pattern is considered a strong indication of a potential price reversal.
  3. It’s how you can be one of the first to see the news that can move stocks.
  4. The patterns are calculated every 10 minutes during the trading day using delayed daily data, so the pattern may not be visible on an Intraday chart.
  5. I want to reiterate the difference in charts when looking at different time frames.

What are the pros and cons of evening star candlesticks?

But you can set custom screens to match whatever you’re looking for. Now, if you get caught in a short squeeze with an electronic stop loss, you could far more than $25. So predetermine your mental stop loss and then stick with it.

How To Trade The Evening Star Candlestick Pattern in 7 Steps

Should the industry mature with the star positioned as a leader, the star will transform into a cash cow. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more.

Position within Trend

The Evening Star pattern is a three-candle, bearish reversal candlestick pattern that appears at the top of an uptrend. It signals the slowing down of upward momentum before a bearish move lays the foundation for a new downtrend. This indecision candlestick pattern helps the traders to give a red flag and thus prevent further buying. The formation of the bearish candle after the Doji signals the bearish confirmation.

How to Spot the Evening Star Candlestick Pattern

Its reliability is often debated, but it can be enhanced when combined with other technical indicators such as volume or support and resistance levels. By identifying the formation and understanding its implications, traders can make more informed decisions on whether to enter or exit positions in the marketplace. The morning star pattern is the opposite of an evening star candlestick pattern. It’s a reversal pattern from a bearish to a bullish trend. The Evening Star candlestick is a three-candle pattern that signals a reversal in the market and is commonly used to trade forex.

The presence of higher volume on the third candle can reinforce the pattern’s reliability. StocksToTrade’s newest tool, the Breaking News Chat is a game-changer. Two former Wall Street pros sift through news and only post the news that’s most relevant to the stocks I trade.

They have 20+ years of trading experience and share their insights here. Traders should remember that no pattern can predict market movements with absolute certainty and should combine pattern analysis with other aspects of technical analysis for best results. Remember, the RSI is calculated using a certain number of periods — 14 is most common. The shorter time frame on this chart magnifies price action in the RSI. Setting the right time frame depends a lot on your trading strategy.

Upward momentum, controlled by the bulls, begins to lose steam. The star is a period of balance between bulls and bears with little price movement. If you’re a candlestick technical analyst, you might be surprised to learn that the evening star candlestick pattern is not a bearish reversal pattern according to history.

What is required, is an understanding of previous price action and where the pattern appears within the existing trend. 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. The default “Intraday” page shows patterns detected using delayed intraday data.

On the first day, bulls are in charge – new highs are usually made. Targets can be placed at previous levels of support or previous area of consolidation. Stops can be placed above the recent swing high, as a break of this level would invalidate the reversal. Since there are no guarantees in the forex market, traders should always adopt sound risk management while maintaining a positive risk to reward ratio. The bullish version of the Evening Star is the Morning Star and it signifies a potential turning point in a falling market (bullish reversal pattern). The same analysis applied to the Evening Star can be implemented with the Morning Star however, it will be the opposite direction.

Before we discuss the optimal star candlestick trading strategy, let’s discuss how most traders lose money trading this pattern. The chart example above shows how an uptrend ended abruptly directly after the formation of a forex evening star pattern. 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.

The success of this strategy depends on the trader’s ability to properly identify and confirm the pattern, as well as to have a solid risk management plan in place. While the Evening Star pattern is a reliable bearish reversal signal, it’s not a guarantee of market movement, so traders should always have a solid risk management plan in place. I often describe the stock market as a battlefield … And the evening star candlestick pattern is all about battle. There is one final thing that can help you spot the highest probability reversals whenever an evening star forex pattern shows up on your chart. Note how the third red reversal candlestick’s range broke below the low of the first green candle of the same pattern (black dotted horizontal line on the chart above). We previously mentioned that the third reversal candlestick of the evening star pattern often shows an increase in volume.

But trading is vast, and no two traders are exactly alike. I want to reiterate the difference in charts when looking at different time frames. While downgrading the time frame to the five-minute chart is one way of playing this, it’s not set in stone.

You’re starting with the longer-term chart to get the big picture of price action. A sign appears on the chart in front of the trader — the three rivers evening star candlestick pattern. The trader knows the chances of overcoming resistance is slim.

As candlestick patterns are representations of market data, they give us some insight into how the market has acted, which is what we use when trying to predict where prices are heading. A 2014 paper (revised 2019) titled “Learning Fast or Slow? ” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006.

You can (and should) change the time frames I’m giving you to suit your strategy. You should practice with paper trading to test your thesis. These prices monitor the value of a stock over a period of time. An open or opening price is the first price a stock trades at when the market opens in the morning.

It’s important to note that the Evening Star pattern is more reliable if the gap between the first and second candles is significant. The pattern is also more reliable if the bearish third candle is longer than the first candle. Traders should integrate risk management strategies and utilize other analytical tools in conjunction with the Evening Star pattern to enhance trading decisions.

The second candlestick is short and in this case, it’s green, or bullish. The third candle reverses the trend, finishing sharply into the body of the first candlestick. Like the evening star pattern, there are three candles with the middle candle having a long shadow to the downside that’s been bought up by the bulls. The third candle is the confirmation of the pattern turning to the upside. Traditional technical analysis teaches that these patterns are reversals, but the data shows that they likely lead to future short-term volatility. Data-driven forex traders wait for the price to cross above the pattern high and enter short when the price crosses down below that high, setting a stop loss of one ATR.

evening star candlestick

The evening star pattern works as a visual guide of what’s going on in investor sentiment. The day of the evening star candle is the day of indecision between the bulls and bears. Using the following rules, I backtested the evening star pattern on the daily timeframe in the crypto, forex, and stock markets. The name might sound scary to those afraid of the dark, but I’m going to use data to shine a light on this pattern and how to trade it optimally. But first, let’s learn how to identify this three-bar pattern on our candlestick charts.

Also, Day 3 powerfully broke below the upward trendline that had served as support for XOM for the previous week. Both the trendline break and the classic Evening Star pattern gave traders a potential signal to sell short Exxon-Mobil stock. Looking at the chart, once the formation has completed, traders can look to enter at the open of the very next candle. More conservative traders could delay their entry and wait to see if price action moves lower. However, the drawback of this is that the trader could enter at a much worse level, especially in fast moving markets.

The evening star pattern is a stock chart pattern that some traders use to spot a trend reversal. This three-candle chart pattern shows the bulls are running out of steam and the bears are about to take over the stock’s price action. This pattern requires three candlesticks to appear in a specific sequence. In an uptrend reversing to the downside, it will be a long white or green candle, followed by a short black or red candle that opens and closes within the body of the first candle. The third candle will be a black or red candle that closes below the close of the previous candle.

But failure to understand the patterns could spell the end of your trading career. It’s a good idea to employ various indicators to help you predict price movements but the evening star pattern can be a solid tool. It’s particularly useful in identifying downward trends but it can admittedly be a bit difficult to pin down. Options like trendlines and oscillators can help and don’t overlook the value of a broker’s advice and assistance. The doji pattern occurs when the open price of a stock is the same or nearly the same as the close price.

Fees and overtrading are major contributors to these losses. I have top students who trade completely differently from me. I like to keep things simple with setups like the first green day or morning panic. But I have students who love to short or study technical indicators like the MACD or the RSI. To recognize an evening star chart, you need to be familiar with the above graphic.

There are a limited number of patterns and a limited number of things you need to put in your plan. If you get on it and learn them, you can start creating a trading plan. Then, when the time comes to trade, you’ll know exactly what you’re going to do in any situation. If you’re wondering why you should pay for a stock screener, let me lay it out.

However, new stocks are not automatically added to or re-ranked on the page until the site performs its 10-minute update. To be included in a Candlestick Pattern list, the stock must have traded today, with a current price between $2 and $10,000 and with a 20-day average volume greater than 10,000. In this strategy example, we use volume in an attempt to filter out bad trades. By demanding that the Doji is formed with more than twice the volume of the preceding bar, we assume that a volume blowoff manages to deplete the last bullish strength in the market. For example, let’s say that you trade a market that tends to perform worse in the second half of the month. If then you spot an evening star around the 15th, you can be a little more certain that it will work out well.

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. The psychology is rooted in investor reaction to evolving market dynamics. As conditions change, a collective reassessment of the asset’s value unfolds, leading to the bearish pivot implied by the Evening Star formation. Join my Trading Challenge to get access to all my live webinars, DVDs, video lessons, and to learn my favorite patterns to trade.

For all the basics on how to trade commodities, see our introduction to commodity evening star candlestick trading. The bullish equivalent of the Evening Star is the Morning Star pattern.

When you short, you lose money if the share price rises above your entry price. That’s because you pay more for the shares needed to close your position. Short selling is when you borrow and sell shares of a stock. Assuming the price drops, you then buy shares at a lower price to pay the shares back to the broker.