How to Recognize the Morning Star Candlestick Pattern with Technical Analysis
Japanese candlestick charts are not necessarily complicated to read. But when it comes to visual patterns, we must be extra cautions.
The morning star pattern typically appears under a specific condition. Given it works as a reversal signal, it must show up at the bottom of a downtrend. It means that the pattern is only valid if prices have been in a declining momentum in the past sessions.
Take a look at the example below.
We are looking at Ethereum (ETH) daily chart prices. We have here an example that truly has all of the components of the morning star pattern in itself. Three candles. A long red candle. A short middle one. A third long bullish candle.
If you use screeners or indicators that automatically flags for bullish candlestick patterns, this would probably trigger them.
However, if we look at the bigger picture, the conditions are not favoring a strong bullish reversal. First, the pattern does not seem to show up at the bottom of a downtrend. Quite the contrary, it appears during a short rally after prices broke out of a consolidation range.
Traders who bought ETH expecting an explosive bullish move ended up getting their hopes frustrated as prices reversed back down just days after the pattern formation, leading the prices to yet another consolidation range, even lower than the previous one in the price chart.
When trading candlestick patterns, it’s important to evaluate the entire context. These patterns also tend to follow unique formations. Not all morning star pattern is identical to the other.
In some tutorials and books, you’ll see authors saying that the middle candle must gap down the first candle and that the third candle must gap up the second one. But that’s not how things work in the chaos of real-world price action. You must develop some flexibility while still maintaining yourself grounded to common sense.
If a morning star appears during rallies or consolidation ranges, it might be better to avoid entering the trade. I would also advise to look for strong third candles. A good third candle is one that reclaims at least over 50% of the body of the first candle.
How to Trade the Morning Star Pattern Step-by-Step
To get the best out of your trading decisions, you must develop a systematic approach when using the morning star pattern.
In this session, we will build an algorithm designed to increase assertiveness and reduce noise. Our goal is to execute the trade with maximum precision.
- First and foremost, we’re going to decide what assets we’d like to trade. Luckily, technical analysis is pretty much universal. It works on the DAX index, Bitcoin, Forex, EUR/USD currency pair, etc. The choice won’t be much based on the morning star pattern, but your own particular reasons, such as volatility levels, timeframe, etc.
- After you have chosen the asset and timeframe, we can start developing a trade system based on the morningstar pattern. TradingView offers community-built indicators designed to track down and highlight the pattern in candlestick charts. I highly recommend you try them and pick one to use. Recognizing candlestick patterns with the naked eye can be tricky, especially if you’re a beginner.
- Use additional indicators to confirm the context and strength of the pattern. Remember, the morning star pattern is a potential bullish reversal signal. Use a moving average (20 SMA or 50 SMA) to help define and confirm that the asset has been in a downtrend. The RSI can also help in defining whether the stock is reaching oversold levels, where bearish momentum tends to wind down.
- Take a look at the current history of price action. I like using the weekly chart to highlight support levels. A morning star formation at or around a support level gives us additional confidence in a potential reversal.
- If your screener shows a morning star formation below the moving average and near a support level, we have a relevant signal. Before jumping in and opening an entry order, analyze the volume on the third candle. If the volume is significant, it means traders and investors are backing up the pattern, which signals a reliable bullish kick off. If the third candle closes above the midpoint of the first candle of the pattern, we have yet another strength indicator.
- A green candle with larger-than-average volume closing above the pattern’s third candle confirms the reversal. This is where most traders get in, putting a stop-loss order right below the low of the second candle of the pattern to protect their trade.
When Candlestick Chart Patterns Don’t Work: Failed Confirmation and Bearish Traps
No candlestick pattern guarantees that things will go the way you think. Although a morning star pattern may suggest that prices will rise up, this doesn’t always happen. Patterns will fail.
Sometimes, the trader jumps in too early. Or the pattern wasn’t formed under relevant context. But sometimes you see a textbook example that still fails. But why?
Because that is the nature of the market. There are many things moving price action. Geopolitical events, the psychology of those involved in the market, you name it.
Things can change pretty fast. And no one can have total control over where prices will move to.
The only thing in your power is deciding when you’ll act.
Relying solely on the pattern is an invitation to failed entries due to low-probability setups. If you want to avoid traps and improve your statistical advantage, you must use these patterns in addition to other technical analysis indicators (moving averages, oscillators, volume).
Besides that, keep an eye out on market sentiment through relevant social media networks like X and Reddit. Follow news and profiles that are relevant to the assets you trade, so you can see beyond what candlesticks tell. If applicable, learning about fundamental analysis can also be a wise decision.
Bullish or Bearish? The Differences Between Morning Star and Evening Star
The morning star is a bullish pattern. It appears at the bottom of downtrends.
But there is another pattern that mirrors it perfectly. The evening star. The main difference, however, is that the evening star is a bearish pattern that appears at the peak of uptrends and precedes a crash.
The image below exposes how the evening star compares to the morning star in appearance.
Both patterns are formed by three candles. Where the first one is at the direction of the main trend, the second one marks an inflection point, while the third candle explodes toward the opposite side of the trend.
In practice, the morning star allows you to buy discounted assets. The evening star allows you to short-sell expensive ones.
Both patterns depend highly on context and should be used in conjunction with other indicators.
Conclusion
In this article we went through the details of one of the most popular candlestick patterns indicating a potential trend reversal. The morning star pattern.
Not only you learned what the pattern looks like and how to identify it on price charts, but you also learned what it prints onto the chart. An aggressive shift in market psychology. Where traders and investors quickly move from pessimism to optimism.
Although powerful, candlestick patterns like this one should be seen through the lens of probability. They are not a guarantee of reversals, but they are warning signs.
Indicators like moving averages, RSI, Stochastic Oscillator, Bollinger Bands, volume, among others can and should be used to measure the strength of the pattern.
Risk management is still mandatory when trading candlestick patterns, as they can fail due to several reasons. As a rule of thumb, avoid risking more than 2% of your trading capital.
Keep a trading journal and write down every single entry and exit point. Write down the logic behind your decisions. Keep analyzing and adapting, while refining your strategy to increase your statistical advantage.
