The morning star candlestick is a popular price action pattern 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.

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. It consists of three candles.

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

1. Downtrend: The market should be in a downtrend, and the first candle should be long and bearish.

2. 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.

3. 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.

When Morning Star Candlestick Patterns Occur

Traders can identify the morning star candlestick pattern in stocks, forex pairs, commodities, and cryptocurrencies*. It may also be observed across various timeframes, from minutes to weeks.

Generally speaking, a morning star pattern can be considered more reliable when it appears on a higher timeframe. For instance, a morning star candlestick pattern has more significance when it occurs over three days vs three minutes, given the increased amount of price action and market participation reflected over longer periods.

Psychology Behind the Pattern

The morning star reversal pattern reflects a shift in market sentiment from bearish to bullish. Initially, a strong bearish candle indicates prevailing selling pressure. The second candle, with its small body, suggests indecision as the market stabilises and neither bulls nor bears dominate. This pause indicates that sellers are losing momentum. The third morning star candle, a strong bullish one, confirms the shift as buyers take control, driving prices higher. This pattern signals that the downtrend is likely exhausted, and a potential reversal is underway due to increasing buyer confidence.

Trading with the Morning Star

Traders can use the following steps to trade this setup:

1. Identify the setup: Look for a setup on the chart formed after a solid downtrend.

2. Confirmation: After identifying the formation, traders should confirm it before entering a long position.

3. Enter a long position: Consider entering a long position once the formation is confirmed.

4. Determine a take-profit target: Although candlesticks don’t provide specific entry and exit points, traders may consider the closest resistance level to take potential profit.

5. Monitor the trade: Continuously monitor the trade and adjust the stop-loss and take-profit levels as needed based on market conditions.

What Is the Morning Star Candlestick Strategy?

The morning star trading strategy leverages the formation's ability to signal a bullish reversal after a downtrend. The formation's reliability increases when it occurs at a support level and is confirmed by a momentum indicator like the RSI or MACD.

Entry:

• Traders look for the full morning star to form at a support level.
• They then look for a confirmatory bullish signal from a momentum indicator, such as RSI showing oversold conditions, a bullish MACD crossover, or a bullish divergence in either.
• Traders may wait for additional confirmation, like RSI moving back above 30, or enter on the close of the third candle in the pattern.

Stop Loss:

• A stop loss might be set below the swing low of the setup.
• Alternatively, traders may place the stop loss beyond the lower boundary of the established support level.

Take Profit:

• Profits might be taken at a predetermined risk-reward ratio, like 2:1 or 3:1.
• Traders also often aim for an opposing resistance level where a further reversal might occur.

Morning Star and Other Formations

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

Morning Doji 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 morning doji 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.

Evening Star

In contrast to a morning setup, an evening star is a bearish setup 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.

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

Benefits and Limitations of the Morning Star Candle

The morning star is a useful tool for traders seeking to identify potential market reversals, but it does come with some benefits and limitations.

Benefits

• Strong Reversal Signal: Indicates a bullish reversal after a downtrend, helping traders anticipate upward moves.
• Broad Applicability: Effective across various financial instruments such as forex, stocks, commodities, and cryptocurrencies*.
• Timeframe Flexibility: It can be observed on different timeframes, from intraday to weekly charts.

Limitations

• False Signals: Like all patterns, it can produce false signals, especially in volatile markets.
• Confirmation Needed: A morning star pattern entry requires confirmation from additional indicators or formations to improve accuracy.
• Experience Required: Identifying the formation correctly and interpreting its signals requires experience and a good understanding of price action.

Final Thoughts

While candlestick formations such as the morning star can be useful 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 when making their trading decisions. Traders should also incorporate technical indicators and develop risk management techniques to potentially minimise losses. If you are ready to test a trading strategy with the morning star, open an FXOpen account and start to use this pattern in live trading.

FAQ

What Is a Morning Star in Trading?

The meaning of a morning star in trading refers to a bullish reversal formation consisting of three candles. It appears at the end of a downtrend, indicating a potential shift to an uptrend. The setup includes a long bearish candle, a small-bodied candle, and a long bullish candle.

Is the Morning Star Bullish or Bearish?

It is a bullish candlestick pattern that indicates a potential reversal from a downtrend to an uptrend in the market. It suggests that the selling pressure is subsiding, and buying pressure is beginning to take over.

What Does the Morning Star Pattern 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 turn is followed by a long bullish candle closing above the midpoint of the first one.

What Is the Opposite of Morning Star?

The opposite of a morning star is the evening star, a bearish reversal pattern. It appears at the end of an uptrend, signalling a potential shift to a downtrend. The morning and evening stars are similar, except the latter mirrors the former, consisting of a long bullish candle, a small-bodied candle, and a long bearish candle.

*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.