What Is The Morning Star Candlestick Pattern? What Does It Stand For?

Introduction:

What Is The Morning Star Candlestick Pattern?

The Morning Star candlestick pattern is a bullish reversal pattern that usually signals a possible turnaround in a downtrend. The Morning star pattern has a small body, forms at the bottom of a downtrend and is an indication of an upward trend reversal. When the Morning star occurs without a body, the pattern is called the Morning star doji. 

The Morning star doji pattern is deemed more powerful because the doji underscores indecision and impending change in market sentiment. The Morning star candlestick pattern is a visual pattern consisting of three candlesticks, namely: A tall bearish downward candlestick, a short bullish or bearish candlestick located in the middle and a tall bullish upward candlestick at the end.

The middle candlestick of the Morning star candlestick pattern forms a star, hence its name. The Morning star candlestick pattern is the direct opposite of the Evening star pattern, which signifies a bearish reversal at the top of an upward trend. 

The Morning star pattern indicates prospective buying opportunities as it suggests a shift in market sentiment. Traders use it alongside other indicators to improve reliability and determine when to enter a long position. 

It is a dependable reversal pattern in technical analysis. The Morning star pattern is relevant in a variety of markets including stocks, forex, crypto and commodities. The Morning star candlestick pattern is effective across various timeframes and its dependability increases with longer time frames.

The credibility of the Morning star candlestick pattern depends on certain factors such as volume and momentum indicators. The morning star candlestick pattern is present at stock bottoms, allowing traders take advantage of the trend shift opportunities it can harbinger.

How Does a Morning Star Candlestick Pattern Work?

The Morning star candlestick pattern, as aforementioned, is made up of three components:

1. First Candlestick (Bearish): The Morning star candlestick pattern starts with a long bearish candlestick, showing high selling pressure and a downward trend.

2. Second Candlestick (Bullish or Bearish): The second candlestick is often smaller, and may be bullish or bearish. The second candle connotes indecision. At the second candlestick, neither buyers nor sellers have control of the market.

3. Third Candlestick (Bullish): The final candlestick in the Morning star pattern is a long bullish candle that closes above the midpoint of the first candle. 

The third candlestick signifies buying pressure, pushing the price higher. The turnaround from the bearish push downward as witnessed in the first candle indicates that the market trend is making a reversal. The Morning star candlestick pattern must appear at the end of a downtrend for it to be confirmed. 

A major verification of the Morning star pattern is the volume of the last candle. The third candlestick should have a higher trading volume than the initial candles, supporting the proposition that it is a bullish indicator.

The Morning star candlestick pattern forms after a notable downtrend lasting from 3 to 10 red candles. The morning star candlestick pattern requires at least 3 days to fully form, each day representing a trading session and each trading session aligning with a distinct candlestick. 

To trade the Morning star candlestick pattern, traders should take the following steps:

• Confirm that it is a true Morning star pattern.

• Enter a long buy position.

• Practice adequate risk management, ensuring to use no more than 2% of capital for each trade. 

When the Morning star candlestick pattern combines with other technical tools such as Moving Averages, Support/Resistance Levels and Momentum Indicators, the success rate of the Morning star pattern enhances. 

The Morning star pattern is not a foolproof signal and has the ability to fail. Other drawbacks of the Morning candlestick pattern include: 

• Risk of false signals.

• In a turbulent market, the Morning star pattern is likely to create whipsaw trades

• The Morning star candlestick pattern does not provide specific profit objectives.

• Uncertainty of stop loss placement.

Morning Star vs. Evening Star: A Comparative Look

While both the Morning Star and Evening Star are three-candlestick reversal patterns, they signal opposite trend changes. Understanding their differences is crucial for traders.

Key Differences and What They Signify:

• Direction: The most fundamental difference is the direction of the trend reversal. The Morning Star predicts a bullish reversal (price increase), while the Evening Star predicts a bearish reversal (price decrease). 

• Gap: The gap between the first and second candle is also a key distinction. In the Morning Star, the second candle gaps down from the first. In the Evening Star, the second candle gaps up. This gap is a sign of strong initial momentum in the direction of the previous trend.  

• Third Candle Confirmation: The third candle provides confirmation of the reversal. In the Morning Star, a strong bullish candle confirms the shift to an uptrend. In the Evening Star, a strong bearish candle confirms the shift to a downtrend. The strength of the third candle is important; a longer body suggests a more powerful reversal.  

Explanation:

Imagine a stock has been in a downtrend. A long, bearish candle forms (first candle of a potential Morning Star). The next day, a small-bodied candle, perhaps a Doji, gaps down (second candle). Finally, a strong bullish candle appears, closing well into the body of the first candle (third candle). This is a Morning Star, suggesting the downtrend may be ending and an uptrend beginning.

Conversely, if the same scenario played out after an uptrend, with the gap being up and the third candle being bearish, it would be an Evening Star, signaling a potential downtrend

Conclusion 

The morning star candlestick pattern, similar to any other technical analysis tool and reversal signal, requires thorough risk management in order to safeguard against false signals.