Mastering the Evening Star Pattern

The evening star candlestick is a widely recognised formation in the trading world. It carries importance for technical analysts and traders looking for potential market opportunities. In this article, we will explore the intricacies of the setup and various aspects related to its interpretation and application in trading strategies.

What Is an Evening Star Candlestick Pattern?

The evening star is a pattern on a candlestick chart used in trading to identify potential reversals in market trends. It is considered a sell signal and often occurs at the end of an uptrend. The setup consists of three candles:

The first is a large bullish bar, indicating strong buying pressure.
The second is smaller and can be either bullish or bearish. It represents indecision in the market.
The third is a significant bearish bar, indicating intense selling pressure.

The evening star pattern in the stock, forex and other financial markets suggests that the buying momentum is weakening and a trend reversal may occur. It is typically interpreted as a sign for traders to consider selling or taking profits on their long positions.

How to Trade with the Evening Star Chart Pattern

Trading with this setup involves a systematic approach. Here are some steps you may consider when trading the evening star:

Identify the Setup: Look for a series of three candles that form the setup.
Confirmation: It is crucial to confirm the setup with additional technical indicators or signals. Look for other sell signals, such as overbought conditions, resistance levels, trendline breaks, or divergences in oscillators, to strengthen your conviction in the potential reversal.
Entry Point: Once the formation is confirmed, determine an entry point for your trade. One common approach is to enter a short position below the low of the bearish bar or below a predetermined support level. This helps to ensure that the reversal is indeed taking place before initiating a trade.
Set Stop-Loss and Take-Profit Levels: To manage risk, establish a stop-loss level above the recent high or the candle's high. Additionally, define a take-profit level based on your risk-reward ratio or technical analysis tools to secure profits as the price continues to decline.

Example

A trader spots a setup on the TickTrader platform by FXOpen. They identify three candles and mark them on the chart as a reference and enter the position below the low of the third bar. The take profit is at the next support with a stop loss above the setup.

Evening Star and Other Patterns

Let’s consider the most common formations the evening star is confused with:

Evening Star vs Evening Doji Star

The key difference between them lies in the appearance of the second bar. In the former, the second bar has a body. However, in the latter, the second bar is a doji candle. The doji has a small or non-existent body, indicating that the opening and closing prices are very close or the same. The doji signals market indecision.

Evening Star vs Morning Star

The evening setup signals a potential reversal at the end of an uptrend. It consists of a large bullish bar, followed by a small bullish or bearish one, and a large bearish one. On the other hand, the morning star signals a potential upward reversal at the end of a downtrend. It consists of a large bearish candle, followed by a small bullish or bearish bar, and finally, a large bullish one.

Final Thoughts

The evening star is an important tool in technical analysis. By understanding the structure and characteristics of this formation, traders may enhance their decision-making processes and identify potential trading opportunities. After developing a thorough understanding of the setup, traders may choose to trade it on various markets by opening an FXOpen account.

FAQ

What is the evening star pattern?

The evening star is a bearish candlestick formation that appears at the end of an uptrend. It consists of large bullish, small bullish or bearish, and large bearish candles. This setup suggests a potential reversal in the uptrend, indicating a shift in momentum. It is important not to confuse it with the evening doji star candlestick pattern, as the evening doji includes a doji candle in the second position instead of a small bar.

How do you trade the evening star?

When trading the formation, traders typically look for confirmation signals, such as additional indicators or technical analysis tools, to strengthen the formation's reliability. Entry points can be determined by initiating short positions below the low of the bearish candle or below key support levels. Stop-loss orders are often placed above the recent high or the formation to manage risk, while take-profit levels can be set based on risk-reward ratios or technical analysis indicators to secure profits.

What is the evening star in crypto?

In the context of cryptocurrency* trading, there isn't a specific "star formation" unique to the crypto market. The same trading rules can be applied to analyse price movements and make trading decisions in the crypto market.

*At FXOpen UK and FXOpen AU, Cryptocurrency CFDs are only available for trading by those clients categorised as Professional clients under FCA Rules and Professional clients under ASIC Rules, respectively. They are not available for trading by Retail clients.