Stars have been used for path finding for a very long time. Believe it or not, stars are also used for the same reason in the forex market. But how exactly?
One such star is the morning star pattern. It is one of the most important candlestick charting patterns that are widely applied by all sorts of traders in various markets. In this article, we are going to discuss the morning star candle pattern and see how you can use it to enhance your trading skills and outcomes.
Just like ships and planes, forex traders need powerful and precise navigation systems that can guide them through the storms and safely into their desired destination.
An important part of this navigation system in any financial market are the tools and techniques used for chart analysis. One such approach is known as candlesticks.
As the name suggests, a candlestick on the chart is a shape that closely resembles a candle – i.e. one that has a main part or body of the candle, in addition to the wick, otherwise known as the candle’s shadow. But this so-called shadow can be seen on both ends of the candle, signifying the highest and lowest prices registered by the candle during its formation.
An important point about the body of the candles is that the body can be either empty (also white or green) or filled (also black and red).
These candlesticks are used to represent price movements on a chart. And like any other charting approach, a trader can detect certain patterns formed by these candles.
One of the main categories of these patterns is derived from the number of candles that are used in the formation of the pattern. As such there are single, dual or double, and also triple candle patterns. The names are pretty self-explanatory.
Our main focus in this article, as mentioned above, is the morning star candle pattern, which itself is a triple candle pattern. Let’s see what it exactly is, what kind of information it can provide for you, and how you can benefit from it.
The Morning Star: Basic Definition
As we said before, the morning star candlestick pattern is a triple candle pattern. It clearly means that there are three candlesticks involved in the formation of this pattern. As such, it would take three days for the morning star to form – one day for the formation of each candlesticks.
In the next section, we will discuss the meaning of the morning star in more details, but suffice to say that the morning star is a bullish candle pattern, one that signifies the beginning of an uptrend. For now, let’s focus on the formation and shape of this pattern.
How are the candles placed next to each other?
The first candle in this formation is a long red or filled candle. This means the closing price is much lower than the opening price. So the body turns red indicating a reduction in price during the formation of this candle. And keep in mind that he body is long, which means the price reduction was rather substantial.
The second candle can be either red or green – usually green. But the important point about it is that it is very small. This means the opening and closing prices for this day are very much so close to one another – this forming a really small body. And also, the second candle stands just under the first one.
The third and last candle is a long-bodied green candle that stands just over the second candle but it is a bit shorter than the first candle. And as we said it is green. So it means the closing price for the candle is much higher than its opening. Therefore, signaling an immense increase in the prices over the course of one day.
This is how a morning star is formed. But what does it mean exactly? Let’s find out in the next section.
What Information Does the Morning Star Provide?
The morning star pattern is a bullish pattern. It is a signal for the beginning of an uptrend. As a result, it is usually seen near the end of a downtrend.
In fact, many regard the morning star pattern as a sign that the downtrend has reached its bottom.
So when you see the morning during a bearish run of the market, you ought to be warned that the bears are losing their power and control over the market. And that the prices are likely to reverse toward the bullish area at any point in the near future.
How Can You Detect the Morning Star Pattern?
There are certain signs that are important for the recognition and final detection of a morning star.
First and foremost, the pattern needs to be seen while there is already a downtrend in the market. Remember, the morning star is a bullish reversal.
Secondly, the candles need to be in the exact order and shape that we discussed above. Starting with a long red candle, which clearly indicates there is already a downtrend. Then a very small candle, which is clearly the sign of uncertainty in the market with regard to price movement. Lastly, it closes with a green candle with a long body, which represents that market has found its path forward, and it is indeed an increasing one.
Trading with the Morning Star in Forex
When we discuss the morning star candle pattern, we can safely assume that the trade was already aware of the bearish run of the market. In fact, we will further assume that the smart trader in our example had already taken necessary measures to benefit from the above-mentioned downtrend – i.e. the trader had already opted for a short position.
And now with the detection of the morning star pattern, the trader knows that the downtrend is about to end. So the best path forward would be to adjust the position and get out of the short positions.
Since the prices are highly likely to rise and go into an increasing trend, the morning star can be a very reliable signal to enter into long positions.
Morning Star vs. Doji – Two Peas in Pod?
The Doji itself is a single candle pattern that is a strong signal for market uncertainty and indecision. It has medium height upper and lower wicks, but the body is dead flat. It means the opening and closing prices are exactly the same. Therefore, it forms something like a cross shape.
Of course, it can be detected on its own or especially when there is no specific trend in the market, otherwise when the market is moving sideways.
But sometimes, after a long red candle we see a Doji, which is then followed by a long green candle – therefore the morning star.
But this morning star has a Doji as its middle candle.
What would that mean?
Luckily it does not create a different pattern. It is the exact same as a normal morning star but much more powerful.
So when you see a morning star pattern with a Doji pattern in the middle, you can consider that as a more reliable sign that a bullish reversal is in the making.
The morning star is a triple candle pattern that forms over the period of three days. It is a bullish reversal sign. So it is to be expected when there is a downtrend in the market, and the bearish run is about to run out of steam. Forex traders can rely on this pattern to adjust their positions and get ready for price increase.