Morning Star Candlestick Pattern: Trading Rules

FXOpen

The morning star candlestick is a popular price action setup that technical analysts and traders use to identify potential trading opportunities. It indicates a reversal from a bearish to a bullish trend and is a valuable addition to any trader's toolkit. In this article, we will cover all the technical aspects of the morning star candlestick pattern, including how to trade it effectively, and we will describe strategies for managing the associated risks.

What Is the Morning Star Candlestick Pattern?

The morning star in technical analysis is a reversal formation that appears at the end of a downtrend and signals a trend reversal. The formation consists of three candles.

To identify it on the chart, you should look for the following:

  • Downtrend: The market should be in a downtrend, and the first candle should be long and bearish.
  • Indecision: The second candle is usually expected to have a gap down, but gaps are uncommon in forex. Therefore, a small-bodied candle is considered sufficient. It's worth noting it can be either bullish or bearish, but if it’s bullish, the signal is stronger.
  • Significant increase: The third candle should be strong and bullish and close above the midpoint of the first bearish one. If it forms with a gap up, the buy signal is considered stronger.

While spotting this formation may take some experience and chart knowledge, it can be a powerful tool in a trader's arsenal. Besides a morning star forex pattern, you can trade with stock, commodity, and cryptocurrency* formations. At FXOpen, traders have the opportunity to use technical analysis across a wide range of financial instruments, including forex, stock, ETF, index, cryptocurrency*, and commodity CFDs.

Morning Star and Other Patterns

Traders should not confuse the morning star candle formation with other formations, such as the evening star, which is the complete opposite.

Doji Morning Star

In a traditional morning star reversal pattern, the candle that appears in the middle of the formation has a small real body, meaning there is a clear difference between the opening and closing prices.

In a doji morning star formation, the second candlestick has characteristics of a doji, where the opening and closing prices are very close to each other, resulting in a very small real body. This reflects the indecision as neither bulls nor bears can take control of the market.

The doji setup is less common than the traditional formation, but it still signals a potential upward movement after a prolonged downtrend.

The green arrow highlights the doji candlestick within the morning star candlestick pattern in the stock chart of Meta.

Evening Star

In contrast to a morning setup, an evening star is a bearish pattern occurring after an uptrend. It also consists of three candles – a long bullish one, a small-body one (it can also be a doji), and a long bearish one that closes below the midpoint of the first bullish candle. This suggests that the market is about to turn down.

The M5 chart for USDCHF shows an evening star price action – the bullish candle (1) is followed by the small doji candle (2) and the bearish candle (3), which confirms that bears are taking control of the market.

Before entering live trading, you can analyse the morning and evening setups for free using the FXOpen TickTrader platform.

Trading with the Morning Star Candlestick Pattern

Traders can use the following steps to trade with the morning star:

  • Identify the setup: Look for a star formation on the chart, formed after a solid downtrend.
  • Confirmation: After identifying the star formation, traders should confirm the pattern before entering a long position. One way to confirm it is to look for a bullish candle that follows the star formation. Traders may also consider using technical indicators such as the relative strength index (RSI) and its overbought/oversold signals or moving average crossover to confirm the reversal.
  • Enter a long position: Consider entering a long position once the pattern is confirmed. Traders usually place a stop-loss order below the lowest point of the formation to manage risks.
  • Determine a take-profit target: Enter the trade when the next green candle closes and close the position at any resistance area or supply-demand zone. Traders sometimes look at higher timeframes and close the trade when the price goes near the significant resistance level.
  • Monitor the trade: Continuously monitor the trade and adjust the stop-loss and take-profit levels as needed based on market conditions.

Final Thoughts

While chart patterns such as the morning star can be helpful tools for traders to identify potential trading opportunities, it is crucial to remember that they are not foolproof and should not be the sole choice of market participants to make their trading decisions. Traders should also incorporate technical indicators and develop risk management strategies to minimise potential losses. Moreover, it is important to be aware of false signals and adjust trading strategies accordingly. Market participants can open an FXOpen account and start implementing their strategies on a demo or a live account.

FAQ

Is the morning star bullish or bearish?

The morning star is typically considered a bullish reversal pattern, appearing after a downtrend.

What does the morning star candlestick indicate?

It is a three-candle price action, often indicating a bullish reversal in the market. It suggests that selling pressure has been exhausted, and buyers are starting to gain control of the market.

How do you read the morning star pattern?

To read the morning star formation, traders should look for the following characteristics: a long bearish candle formed in a solid downtrend and followed by a bullish or bearish candle with a small real body, which in its turn is followed by a long bullish candle closing above the midpoint of the first one.

*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.

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

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