Star" candlestick pattern - a signal for trend reversal
In today's article, we will consider in detail one of the tactics of trading by technical analysis, namely the reversal candlestick patterns, which are called "Stars" in the market. What are these reversal patterns, how to identify them on the price chart in the trading process, what signals to open positions they show, and this is what we will talk about next.
Shaping the "Star" pivot model
In the market it is believed that reversal candlestick patterns often give very strong signals for a close reversal trend in the opposite direction. As mentioned earlier, these include the "Star" type models, which in turn have subspecies: morning star and evening star, but we will return to them in more detail a little later.
What is this - candlestick pattern "Star"? It's Japanese candle with a small body, which forms a price break with the preceding candle with a large body. The principle of formation of the "Star" on the chart is identical, both for an uptrend and a downtrend in the market. For clarity, the example is shown in the figure below.
The main identifier of this reversal modelIt can appear both at the top of the trend and at its base. The second identifier is that in most cases it is formed after a candle with a large range, in an uptrend it should be bullish (green), in a downtrend - bearish (red).
In candlestick reversal patterns based on stars can include other candlesticks that amplify signals on a further near trend change in the market .
Now let's look at specific examples of such patterns on the charts, and what signals they show to open positions.
"Morning Star - the strongest trend reversal model
The strongest reversal candlestick patternwhich is based on the "stars" is called the morning star. It can only form at the base, that is, when the market is in a downtrend, and accordingly signals that the price is most likely to reverse its trend (in this case, to an uptrend).
The candlestick model of the "Morning Star" reversal consists of 3 consecutive Japanese candles (see picture above):
- First - a bearish candle, with a long red body;
- Second - with a short body with a break downwards and a long lower shadow;
- Third - bullish candle, with a long green body, which should overlap most of the red body of the first candle. It is the last candle that finally confirms the reversal pattern of the morning star.
Another a sign of ideal model formation (as the technical analysts say), is that the body of the 2nd candle should be reflected with a gap not only from the body of the first, but also from the third candle, and for the first one it should be obligatory! In this case, we get a fully formed pattern and, accordingly, a stronger signal that the trend will change its trend.
As a result of receiving a reversal candlestick pattern morning star, there is a signal to open Buy positions at the closing level of the 3rd candle and setting a stop loss order at the minimum of the second candle.
"Evening Star" - reverse model
Mirroring of the above described reversal candlestick pattern is the Evening Star pattern. In contrast to the previous one, it appears at the top of the current uptrend.
Similarly add up to three bars:
- First - bullish candle, with a long green body;
- Second - the actual star itself with a short body with a gap upwards and a long upper shadow;
- Third - (confirming the reversal pattern) is a bearish candle with a long body, which overlaps most of the green body of the first bar.
In addition, do not forget (!) about the mandatory gap between the bodies of the second and first Japanese candle.
In this case, the incoming exact signal to open a sell trade (Sell) at the close of the red 3rd bar and set the stop loss level at the maximum of the second bar.
When accompanying positions for the subsequent exit from the market you can use the tactic of manual trailing stop.
Morning and evening stars play a very important role at the end of an uptrend or at the beginning of a downtrend on , but they can also be just as significant in other currency market situations. That is, their appearance may be on the borders of trading corridors (for example, using the Murray indicator), as well as on important support and resistance levels. The appearance of a reversal candlestick pattern in such situations serves as a strengthening signal and dramatically increases the probability of a trend change.