What Constitutes the Evening Star Candlestick Pattern
The evening star pattern consists of three candles. It is a potential bearish reversal pattern, so it must appear at the peak of an established uptrend.
If the pattern appears mid-range or at the bottom of a bearish leg, it is not valid.
This formation is an indication that bullish dominance is tapering off. Under specific contexts, it has a very high-probability in predicting a corrective downtrend.
Here are the main characteristics of the formation according to most guides and books:
- First candle: A long bullish candle initiates the sequence. It reflects aggressive buying pressure and moves prices upward in accordance with the main uptrend.
- Second candle: This is the inflection point. This is a star candle, or Doji star, that signals an equilibrium in supply and demand. Bulls have attempted to take prices higher, but selling pressure established a resistance level.
- Third candle: This marks the final formation of the pattern. A long bearish candle represents an influx of overwhelming selling pressure. It takes prices downward very sharply and confirms bearish momentum.
Some tutorial and books will highlight that the second and third candles must gap the preceding one. Although that gives an additional sign of strength, that’s not how candles behave in the real world. Some degree of flexibility is expected when looking at candlestick formations.
Some people also say that the third candle should “erase” at least 50% of the body of the first candle to confirm the validity of the pattern. This would highlight bearish domination over bullish advances.
Below we have an example of the pattern formation in the daily chart for the Nifty Bank Index.
Understanding the Psychology Behind the Evening Star Pattern
You have already seen what the evening star looks like in price charts. But do you know why this pattern emerges in the first place?
Each candlestick represents the aggregation of millions of financial decisions made by market players all over the world. They always give us valuable information on market sentiment.
When the large bullish candle forms, it reflects the excess of optimism among market players. Retail traders are confident the asset will reach even higher levels. Algorithmic models keep purchasing due to the belief that the asset is still cheap. There is absolute conviction that the only way is up.
But when the Doji candlestick appears on the second day, momentum reaches a decisive point. The Doji still shows that enthusiasm is strong as prices move at least slightly higher than the previous session. But it also shows that an unexpected shock happened that day.
Institutional traders and other market players realize that the asset is overvalued. They start to lock in their gains by selling their shares. Some, believing a crash is imminent, start short-selling to profit from a shift from bullish to bearish sentiment.
During the second day, the demand is still strong. But bears put up a wall of resistance where prices can’t move through. This is why the second candle is often a Doji star or has a very tiny body, representing that neither side dominated over the other.
The bearish candle that closes the pattern is a result of an increase in fear among the buy-side. As selling pressure grows stronger, prices go lower. This is enough to trigger stop-loss orders. Algorithms and systems start selling. And prices crash.
If the pattern emerged from optimism and euphoria. It ends in pessimism and panic.
As prices rapidly descend, the buy-side finds it hard to move them back up. The pressure downwards discourage other market players from buying, which is why this pattern tends to result in market reversals. It takes a long time, or an unexpected event, to turn the market back into optimism again.
How to Identify the Evening Star Chart Pattern in Forex and Stock Markets
Although very helpful in trading decisions, candlestick patterns are not always obvious.
Beginners suffer from two main mistakes. They either force the pattern onto incompatible price action contexts (such as in the middle of range-bound markets) or wait for the perfect, textbook example to show up in live markets. Both are unrealistic expectations in their own way.
The absolute, most critical factor, is trend. Don’t forget that this pattern marks a transition from bullish sentiment to bearish sentiment. So the market must be experiencing euphoria and optimism in order for the evening star pattern to truly have any meaning.
If there is no bullish trend, there is no pattern.
The image below shows a good context in which the eveningstar might show up at the left vs a context where it doesn’t hold any true meaning at the right.
Another thing to keep an eye on is the fact that the pattern is formed by three candles that must follow some basic rules:
- First candle must be long and pointed towards the same direction as the main trend.
- Second candle can be of any color, but it must have a tiny body or no body at all. It can’t be too long, either.
- Third candle must also be long, but following the opposite side of the trend.
Some books talk about the gap (as in second candle gaps up and third candle gaps down), but that’s not always seen in real markets. That would be more of a “perfect scenario”, which I don’t suggest you obsess over.
TradingView offers community-built indicators for tracking both the morning star pattern and the evening star pattern all at once. Although these indicators are helpful, you must always make your own assessment of the context in which the indicator flags the pattern, as they’re prone to false signals.
The Evening Star vs the Morning Star
The aforementioned morning star is the opposite of the evening star, as it is a bullish reversal pattern.
Both patterns share visual characteristics, so beware to not misidentify them by confusing one for another.
The evening star appears at the peak of uptrends.
The morning star appears at the bottom of downtrends.
Other similar patterns include the shooting star, which is also a bearish reversal pattern that appears near uptrend peaks. However, the shooting star is formed by a single candlestick that has a small body at the bottom with a long shadow up top.
In practice, the market psychology imprinted by the shooting star is the exact same as that of the evening star, except that it happens during one single trading session. But it also reflects an excess of optimism that ended up finding a resistance that brought prices down.
Last, but not least, the Doji pattern is also among those patterns highly associated with morning stars and evening stars. It is a bullish reversal pattern that appears at the bottom of downtrends.
The Doji, like the middle candle of a morning star, marks an inflection point within a trend where resistance is met, and the other side gains strength and momentum to move prices upward.
Trading the Evening Star Pattern
If we’re trading the evening star pattern, we’re probably short-selling stocks. In this case, we are betting the market will go down and we want to profit from that price decline.
Short-selling is a bit more complex than buying shares. It usually involves concepts like margin accounts as collateral, since you’re essentially borrowing shares to sell.
The risks are substantially higher than simply opening a long position (i.e., buying).
Given such risks, using a stop-loss order to cut losses short is a must. The ideal is placing that order a bit above the top of the middle candle of the formation.
I would also advise against aggressive approaches, where you go short as soon as the third candle is formed. A conservative approach is more adequate here, where you wait for confirmation before making any move. If the subsequent candles keep pushing prices lower, you have a confirmation that market conditions have changed. You can even wait for prices to retest the 50% midpoint of the third candle’s body before entering.
Improve Your Trading Strategies with Additional Indicators
If you have read our previous articles on candlestick patterns, you know relying solely on the pattern is a mistake.
Technical indicators not only help you understand the context in which the patterns form, but they also help you assess the validity and strength of the pattern.
For reversal patterns, like the evening star, I believe the Relative Strength Index, RSI for short, is quintessential. This indicator has the power to signal potential shift in market momentum by highlighting whether assets are overbought or oversold. It does so by comparing the most recent gains to most recent losses to determine whether buying or selling pressure is increasing.
The RSI can also tell you early when the bullish pressure starts winding down. Divergence between price and indicator (price making higher highs; indicator making lower highs) is a huge red flag for imminent bearish momentum.
Simple moving averages are also helpful in identifying long-term trends. It can prevent you from entering the market on the wrong side of momentum. They also function as dynamic support and resistance levels. An evening star candle formation below a long-term SMA drastically improves the probability of a sustained downward move.
Learning about smart money concepts is another great skill to use in conjunction with candlestick patterns. These concepts teach you how institutional players move through market noise. Identifying a dark cloud cover pattern or a head and shoulders pattern under key SMC contexts could be a huge advantage compared to other retail traders.
Every single candlestick formation is prone to failure.
Sometimes we can blame the trader, for misidentifying formations or ignoring the broad context.
But sometimes, even textbook examples fail.
That’s the nature of the market.
Macroeconomic shocks obliterate technical frameworks. If an evening star forms perfectly at a major resistance level, its effects die out if unexpected geopolitical conflicts start or massive earnings are announced.
Pay attention to the economic calendar, so you’re not caught off guard. If relevant, keep your eyes on the news and social media to keep track of your chosen assets.
To avoid catastrophes, focus on capital preservation first and foremost. Don’t risk over 2% of your total trading account on a single trade.
To avoid traps, focus on trading the weekly and daily charts. Candlestick patterns lose a lot of their strength in extremely short timeframes, like the one-minute or five-minute charts.
Keep in my mind that this is a pattern dependent on trend. If the market is oscillating in between a tight range, it doesn’t have the same validity.
Conclusion
The evening star is, without a doubt, a valuable pattern to follow while analyzing price charts. It is pretty much universal and works throughout every single asset class you can think of, from stocks to crypto.
In this article, you’ve learned how to identify the pattern on your trading platform but, even more importantly, you’ve learned why it forms the way it does and what it means in terms of market psychology.
After reading this guide you’re all set to start applying this pattern onto your trading system.
If you’re just starting out, use community-built indicators on TradingView that are able to automatically detect the evening star pattern on the chart for you. But don’t forget to always evaluate the entire context before entering a trade.
Keep a trading journal and write down each trade you open. Put your entry and exit prices in it and the reasons behind every move. This iterative process will lead to continuous progress over time. And always keep risk management by your side.
