The Morning Star candlestick is a three-candle pattern that signals a reversal in the market and can be used when trading in any market. It is crucial to Correctly spot reversals when trading financial markets because it allows traders to enter at attractive levels at the very start of a possible trend reversal.

 

What is the Morning Star Candlestick Pattern?

A morning star is a visual pattern consisting of three candlesticks that are interpreted as bullish signs by technical analysts. A morning star forms following a downward trend and it indicates the start of an upward climb. It is a sign of a reversal in the previous price trend.  It reveals a slowing down of downward momentum before a large bullish move lays the foundation for a new uptrend.

The pattern is made up of three candlesticks:

  • large bearish candle (day 1)
  • small bearish or bullish candle (day 2)
  • and large bullish candle (day 3)

 

How to identify the Morning Star candlestick pattern?

A morning star pattern is a variation of the bullish engulfing pattern. But the second candlestick in this three-candle formation must be a low range candle, such as a spinning top or Doji. The pattern starts with a relatively big bearish candle. Then follows a small real-bodied second candle that is either a Doji or slightly bearish, and then a third candle that has a real body and pulls close to the past.

 

The thought process behind the morning star is as follow:

  • The market should be exhibiting lower highs and lower lows.
  • The first candle is a large bearish candle. The large bearish candle is the result of large selling pressure and a continuation of the existing downtrend.
  • The second candle is a small candle – sometimes a Doji candle – that presents the first sign of a fatigued downtrend. Often this candle gaps lower as it makes a lower low.
  • The third candle is large bullish candle. The first real sign of new buying pressure is revealed in this candle.
  • After a successful reversal, traders will observe higher highs and higher lows but should always manage the risk of a failed move through the use of well-placed stops.

 

What does Morning Star Candlestick Pattern tell us?

When the market is in a bearish trend, most traders expect that it is going to continue down further. The current market sentiment is bearish, and traders are either shorting or out of the market waiting for a bullish trend to start.

When the first candle of the morning star forms, this sentiment holds one. When the second candle is formed, then the market seems to be another bearish day as the candle gaps down. As the market has gone down quite a lot, some traders may begin to think that it is going to reverse.

They start assuming that reverse must be coming, as it has continued down for some time. Due to this the buying pressure increases and it makes it harder for the bears to continue pushing the prices down. The market closes around where it opened, and thus creates a Doji candlestick pattern.

The third-day candle confirms that the bulls have taken control of the prices. The market gaps up and more people are expecting the trend to get reverse. Due to this sentiment, the third candle is a bullish candlestick.

The Difference Between a Morning Star and an Evening Star

The opposite of a morning star is, of course, an evening star. The evening star is a long green candle followed by a short red or green one and then a long red one that goes down at least half the length of the green candle in the first session. The evening star signals a reversal of an uptrend with the bulls giving way to the bears.

The Difference Between a Morning Star and a Doji Morning Star

The morning star pattern comes in a minor variation. When the price action is essentially flat in the middle candlestick, it forms a Doji. This is a small candlestick with no significant wicks – not unlike a + sign. The Doji morning star shows the market indecision more clearly than a morning star with a thicker middle candle. The appearance of a Doji following a black candle will generally see a more aggressive volume spike and a correspondingly longer white candle due to more traders being able to clearly identify a morning star-forming.

Limitations of Using the Morning Star Pattern

Trading purely on visual patterns can be a risky proposition. A morning star is best when it is backed up by volume and some other indicator like a support level. Otherwise, it is very easy to see morning stars forming whenever a small candle pops up in a downtrend.

 

Key Takeaways:

  • Morning star pattern is formed at the bottom of a downtrend and it gives us a warning sign that the ongoing downtrend is going to reverse.
  • A morning star is a visual pattern made up of a tall black candlestick, a smaller black or white candlestick with a short body and long wicks, and a third tall white candlestick.
  • Traders should analyze the formation of a morning star and then seek confirmation that a reversal is confirmed using technical indicators.
  • When a morning star is backed up by volume and other technical indicators like a support level, then it confirms the signal.

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