Evening Star Candlestick Pattern

The evening star candlestick pattern, very often used by many traders and analysts, is a tool to detect the timing of the reversal of a trend. 

What is Evening Star Candlestick Pattern

It is a bearish form of candlestick pattern which comprises three candlesticks. They are a large white candlestick, one small-bodied candlestick, and a red candlestick. Evening star candlestick patterns are on the top of a price trend. It indicates that the uptrend is about to end soon. The morning star candlestick pattern is the opposite of this stock-price chart pattern. The morning star pattern is a bullish indicator. You may be wondering now how to trade the evening star candlestick pattern. Let’s discuss some factors about it. 

The Gaps

Before developing a sound understanding of the candlestick patterns, it is essential to know price behaviors. Caps are commonly used price behaviors. The two types are gap up opening and gap down opening. 

Gap Up Opening

A gap-up opening is an indication of the buyer’s eagerness. The buyers buy stocks at higher prices than the previous day’s close full stop; this is why the stock opened above the previous day’s close price. For example, if a company closes at rupees 25 and announces its quarterly performance reports after that. If the report is positive, the buyers prefer to buy the stock even at higher prices. It led to an increase in the stock price, although there was no trading happening in between. It is the gap behavior displaying bullish sentiments.

Gap Down Opening

A gap-down opening indicates the bearish mode of investors. They eagerly wait for the market to open so that they can sell the stock even at lower prices. It results in a stock’s price compared to the previous day. It happens in cases where performance results are on the negative side. Even if no trading was happening, the stock opened at lower prices the next day.

How Does the Evening Star Candlestick Pattern Work

Now that we understand price behavior, let us figure out how this stock-price chart pattern works. Candlestick patterns are concise ways of putting forward information regarding a stock. They generally represent the open or close prices and high and low prices of a stock. Each of the candlesticks has a candle and two wicks. The length of a candle is the measure of the range between the highest and lowest price points on a trading day. 

If the length of a candle is long, it is an indicator of higher price changes.
Conversely, a small-length candle shows smaller price changes. So one can say that long candlesticks represent excessive buying or selling based on the direction of a trend. Similarly, short candlesticks show very few movements in the prices of a stock. 

This stock-price chart pattern is a beneficial tool for technical analysis. It predicts the future price momentum and investor sentiments—three candles for the pattern in three days, one for each day. On the first day, the large white candle indicates rising prices with strong momentum. Following this sudden price rise, momentum becomes weaker on the second day, making a smaller candle. The third day has a large red candle as the prices open much below the previous day’s close. It confirms the formation of the stock-price chart pattern. The evening star is a reversal pattern trend and appears after an uptrend in the charts. It only signals the point where there will be a potential downtrend or reversal in the price.

How to Strategize a Trade With the Evening Star Candlestick

This stock-price chart pattern forms at strong uptrends, which may then form the reversal pattern. Once the pattern formation takes place, traders generally prefer to enter at the opening of the next candle. Those unwilling to take much risk can wait and have a good look at the price changes. After the price goes down, they can then decide their next move. 

This strategy has a downside, though, the trader cannot enter at very low levels, especially in rapidly changing markets. One can place targets at previous support levels for consolidated areas. You can apply stops above the latest swing highs because a break at this level will invalidate the current reversal. A trader should employ active risk management methods and maintain positive risk to profit ratios in the forex markets. The prices very often don’t gap as they do in stocks. The three candle pattern thus opens very near to previous closing prices.

Benefits and Limitations

When a trader trades in the forex market, he may find this stock-price chart pattern in quite several instances. That is why some of you may find it very difficult to form the judgments on their basis each time. It is a major disadvantage of this stock-price chart pattern. Also, there are chances that a reversal in trend will take place. It will result in the prices of an asset increasing even higher. 

The stock-price chart pattern presents very neatly defined entry and exit levels despite these challenges. The candlestick patterns are very easy to recognize too. An added advantage is that one can support it by volume and other technical indicators like resistance level. It helps in confirming the signals.

How Can I Identify the Evening Star Candlestick Pattern on a Forex Chart?

To easily recognize a stock-price chart pattern on a Forex chart, one needs to identify the four main candles. Apart from this, one needs to properly understand the previous price actions and locate the patterns arising within the ongoing trend. They include the three candlesticks of this stock-price chart pattern and one Doji candlestick. First, check that the market is showing significant lows. After that, try to look for the candles.

The Large Bullish Candle

It is the consequence of large buying pressures. A Trader generally looks to execute long trades.

Small Bearish or Bullish Candle

It is the small candle showing that the uptrend is weakening. The market here remains undecided, leading to very little price movement. Hence the bearish or bullish nature of the candle does not have much significance.

The Large Bearish Candle

This candle provides the initial significant hint of new selling pressure. In the forex securities, this candle gaps down from the candle of the previous day’s close. It is a signal of the beginning of a new downtrend.

The final step would be to observe the subsequent price movement. After a reversal, usually, traders look for relatively lower high and low price points on the chart. One should also manage the risks of failed moves using the stops properly.

Conclusion

The three candle evening star pattern provides excessive help in identifying short selling opportunities. The pattern is very convenient to spot on a chart which is the best part of it. When combined with other technical analysis tools like horizontal resistance effectively gives new downtrend signals. Therefore traders can use it to decide the entry and exit points during a trade. It would help them time their trades and execute them properly in the direction of the prevailing trend. 

Like any other candlestick pattern, the evening star should be assessed properly with the current trend and along with supporting evidence in the favor of your trade.

The evening star pattern occurs more frequently in the stock charts and it presents well-defined entry and exit levels in the trade. Technical traders analyze security and consider these techniques for selling or shorting the security for the upcoming decline in the stock price.

Frequently Asked Questions (FAQs)