Evening star is a candlestick pattern that stands in direct opposition to the morning star pattern, both of which are used to signal trend reversals in the market.
Trends are perhaps the most important pieces of information in any financial market, including the foreign exchange market or forex. They can signify points of entry and exit for traders, such that they can be most beneficial for them.
As a result, identifying and detection of trends are extremely crucial. Candlestick patterns can help traders better understand and detect various trends and their reversals, among other things. One such pattern is the evening star candlestick pattern.
Having pointed out the importance of this candlestick pattern, stay tuned with us in this article to find out all about it and also how you can actually benefit from it in your forex journey.
What Is an Evening Star Pattern?
The evening star is a candlestick pattern, which is a chart pattern that is formed using candlesticks. This specific pattern is made from three candles, thus being referred to as a triple candle pattern.
Evening star also has a twin that stands in exact opposition to it, known as the morning star. We will compare them later.
Going back to the evening star, the most important feature of this pattern is that it is a bearish reversal signal. This means when this pattern is detected on the chart, it is highly likely that the existing trend will end and a new bearish one will begin.
But remember that for this chart pattern to be what it is, it needs to be detected at the right location on the chart. The same is true for the morning star, which is a bullish reversal signal. The former must be formed during an uptrend and the latter during a downtrend.
Now let’s take a look at the formation of this candlestick pattern.
How Does an Evening Star Form?
As we mentioned in the last part, the evening star is a triple candle pattern. And the precise formation of any pattern is a crucial part of its detection and ultimate interpretation for trades. We will discuss the formation of this pattern part by part.
The first candle in the evening star pattern is a long green candle. It is crucial that the body of the candle needs to be large. And of course the color of the candle needs to be green or white, or in some cases a hollow candle, which is a sign of a price increase. This means the closing price of the day was much higher than the opening price.
This is a strong sign that there is already a bullish trend in the market. This is how this long bodied green candle is registered. The wicks of shadows of the candle are not of much importance. But they are usually short.
The second candle is the crux of the pattern. This is the same as a morning star. The middle candle is the most important one. This is where the star is formed.
In the evening star pattern, the middle candle is a green or red candle with a very small body. So the opening and closing prices are not that important. What is crucially important is that these two prices are close to each other – therefore a very small body is formed.
But keep in mind that the second candle stands just above the first candle.
Also, this candle can be either a spinning top or a Doji pattern. A spinning top would mean a very small body (green or red) with upper and lower shadow. And a Doji pattern would simply mean that the opening and closing prices are the same, so with the wicks a cross shape is formed.
In either case, the second candle in the evening star pattern is the sign of indecision and uncertainty in the market. This is the stepping stone upon which the actual reversal is built.
This gets us to the last and third candle. The third candlestick is a long bearish or red candle. This means the closing price is much lower than the opening price. This candle also stands just below the second candle.
Of course, this is when we know the market has found its direction.
A very strong bearish candle after an indecisive day in the market means the bears have taken over the control of prices.
The Identification of Evening Star Candle Pattern
The way to detect the evening star is similar to most other candlestick patterns. It has two major criteria.
- First, the place of formation itself. The evening star is a bearish reversal, so it should be detected when there is already an uptrend or a bullish trend in the market.
- Second, the precise formation of the candles themselves – i.e. the first one being a long green candle and the last one being a long red candle. The middle candle is also very important, and if it is a Doji pattern, then the chances of a bearish reversal with an evening star are that much stronger.
The Meaning of an Evening Star Candlestick
Simply put, the evening star being a bearish reversal signal means that the existing trend will reverse into a bearish one.
Trends are formed by forces in the market and trader sentiments. But all forces run out of fuel at one point or another. So even when there is an uptrend in the market, it would eventually come to an end.
This is when the uptrend becomes weaker and weaker.
And as we saw, the pinnacle of the evening star is the middle candle, which is the sign of indecision. The traders are not sure which way to turn and so the prices do not have a definite trajectory.
But following the indecisive day, we can see that the traders have made up their mind with a long red candle.
This is how we can understand from the evening star that a bearish trend is in the making.
Thus, when you detect this pattern during an uptrend, you can expect prices to decrease.
How to Trade with the Evening Star in Forex?
Trading with an evening star depends upon the proper and timely detection of this pattern.
So if as a forex trader you are able to identify this pattern at the right time, you can use it as a strong indication that a bearish trend is coming. As a result, you can adjust your current positions and even close any long positions you might have.
Because buying currency pairs might not be a good idea at this point. On the contrary, you can start considering opening short positions in order to protect your equity from falling prices.
The evening star candlestick pattern is used to signal a trend reversal toward the bearish area. It is also a strong indication that the existing uptrend is getting weak and that it will give way to extended price decreases. As a forex trader you can use the evening star as a sign to predict the bear market.