Conclusively, Traders should not completely rely on the Evening Star pattern as they are subject to false signals and continuously changing market conditions. We put all of the tools available to traders to the test and give you first-hand experience in stock trading you won’t find elsewhere. We will help to challenge your ideas, skills, and perceptions of the stock market.
- It is recommended that the pattern be combined with technical indicators and other chart and candlestick patterns.
- If the price is higher than the upper band, the market has overextended itself to the upside, and we can expect it to soon turn around, being typical behavior of a mean-reverting market.
- When the evening star formation appears on a chart, it can alert technically-minded traders to a potential trading opportunity.
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When Do Evening Star Candlestick Patterns Occur?
It also suggests that the third candle is likely to close bearish, leading to an evening star formation. Ultimately, the formation of the third candle tells us that a bearish reversal is likely, and we should be cautious evening star candlestick in our expectations for a continued uptrend. As such, many traders fear missing out (FOMO) on a big short opportunity and set their take profit too far. To combat our feelings of FOMO, we should set multiple take-profit targets, and we can also apply a trailing stop loss to capture the bulk of the bearish move. According to the Encyclopedia of Candlestick Charts by Thomas N. Bulkowski (link), the Evening Star candlestick pattern has a success rate of 71%.
Key Components of the Evening Star Candlestick Trading Strategy
The Evening Star candlestick pattern has a simple three-candlestick structure that is easy to spot at the top. It is recommended that the pattern be combined with technical indicators and other chart and candlestick patterns. The chart above shows MFI and Stochastic exit the overbought zone downwards during the formation of the evening star pattern.
Three Outside Up: Candlestick Patterns
So even though it’s fairly reliable, we can optimise our chances of winning with this pattern by looking for a few confluences. Since we are looking for moves to the downside, we want to trade the Evening Star using resistance levels. The RSI is used to identify overbought situations, which can predict early warning signs of a likely downward price reversal. Another technical indicator that can be used to spot overbought conditions is the stochastic oscillator. We have a basic stock trading course, swing trading course, 2 day trading courses, 2 options courses, 2 candlesticks courses, and broker courses to help you get started. Each day our team does live streaming where we focus on real-time group mentoring, coaching, and stock training.
What is the Evening Star Pattern?
This hybrid strategy of trading the evening star pattern involves using candlestick analysis and technical indicators simultaneously. The evening star pattern forms on the top, indicating a strong resistance level. So, a stop loss must be placed above the “star” and above the resistance level. The bearish engulfing pattern is a bearish trend reversal pattern typically found at the highs of an uptrend. It is created when the price forms a larger bearish candle, which has a closing price below the previous candle.
The third bearish candle should be large and close below the midpoint of the first candle to confirm a strong reversal. This pattern usually appears in a mature uptrend, where the upward trend has gone on for multiple waves, exceeding the average Elliot wave sequence, and a reversal is imminent. When the Evening Star pattern forms at a previous resistance level is provides a more reliable signals with additional context. The Evening Star Candlestick Pattern offers a highly accurate and versatile signal for trend reversals but requires confirmation to avoid false signals. By understanding its advantages and limitations and using additional technical tools, traders can make better-informed decisions and improve their trading outcomes. The most common variation of the evening star is the Doji evening star pattern.
Trading with Resistance Levels
The third day shows a long red candle in which selling pressure has forced the price to around the midpoint of the first day. It’s advisable to consult various technical indicators to predict price movements rather than rely solely on the signals provided by one. Long candlestick bodies are indicative of intense buying or selling pressure, depending on the direction of the trend. 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. The Morning Star and the Evening Star have a Doji or a Spinning Top as the second candlestick while the Shooting Star has an inverted umbrella line.
In this blog, we will understand the formation of the Evening Star pattern and will also explain how to trade it properly. Traders should be aware of these different trading patterns, and the Evening Star is an important one to pay attention to. The VIX index, also called the fear and greed index, measures the market’s expectation of future price moves.
- On the contrary, the evening star pattern has a small-bodied second candle, indicating some indecision or a potential stall in the uptrend.
- We can apply the use of oscillating indicators, such as the Relative Strength Index (RSI) and Money Flow Index (MFI) to improve our odds of trading this pattern.
- Whether you are new to trading or an experienced professional, the Evening Star provides an easy-to-recognize signal that can help pinpoint critical market turning points.
He has been a speaker at various colleges and higher institutions, including IIT and IIMs. Discover profitable trading strategies with advanced Scans from StockEdge. We recommend that you have a look at our article on how to build a trading strategy, and our guide to backtesting to find out more. 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.
The Evening Star Pattern must finish above the 50-day Simple Moving Average. The 50-day simple moving average is a trendline that displays the daily graphical representation of closing prices for a stock, averaged over the previous 50 days. It’s a bearish reversal pattern, indicating a potential shift from an uptrend to a downtrend. The pattern typically appears at the top of an uptrend, suggesting that the bullish momentum is weakening and a downward trend is likely to follow. The MACD assists traders in spotting momentum changes and potential reversals of the trend by analyzing the relationship between moving averages over different time frames. When used in conjunction with the Evening Star candlestick pattern, it generates a compelling signal for entering a short position.
The Three Black Crows pattern is a bearish reversal pattern that appears at the top of an uptrend, consisting of three long bearish candles. A common strategy is to enter a short position when the price falls below the low of the third bearish candle. This ensures that the bearish reversal is strong enough to follow through, reducing the risk of a false signal. The evening star and shooting star patterns both appear at the top of an uptrend and indicate bearish reversals but differ in structure and context.
Instead of relying solely on chart patterns, our technology provides data-driven insights, helping traders make smarter, more confident moves in the market. Use indicators like RSI, moving averages, and volume analysis to confirm the pattern and reduce the chances of false signals. The third candle in the Evening Star Candlestick Pattern is a large bearish candle that confirms the reversal.