Trading Guides Forex

Evening Star Candlestick - Forex Trader’s Guide

By Stelian Olar, Updated on: Jul 12 2024.

Have you ever noticed how the twinkling evening stars seem to signal the end of the day? Just as these celestial bodies foreshadow the coming night, the evening star candlestick pattern can herald the end of an uptrend in the financial markets.

If you're a technical trader interested in timing market reversals, learning to recognize the evening star candlestick formation can sharpen your skills. This distinctive three-candle pattern offers clues that a bullish trend may be nearing exhaustion.

In this article, we'll explore what is evening star candlestick pattern, how it's formed, and how traders can attempt to profit from this reversal pattern. You'll learn key details like:

• The sequence of candlesticks that make up the pattern
• How to identify a true evening star vs a false signal
• Strategies on how to trade evening star candlestick pattern
• The pattern's reliability for signaling trend reversals

Mastering candlestick chart patterns like the evening star candlestick takes practice, but being able to spot these formations can give savvy traders an edge.

Let's uncover whether the evening star could illuminate the way for your own trading endeavors.

The night sky serves as a canvas for discovery - let's see if this candlestick pattern can spark insight into refreshed market momentum.

What Is the Evening Star Candlestick Pattern

In technical analysis, the evening star pattern candlestick is a bearish reversal pattern that consists of three candles. The pattern consists of:

1. One bullish candle,
2.  Followed by a small-bodied candle,
3. And completed by a large bearish candle.

The candlestick evening star gets its name from the stars that come out in the night sky at dusk. Just as the evening star indicates the day is ending, this pattern signifies a potential trend reversal from bullish to bearish.

The evening star candlestick pattern meaning is a warning of a potential top or reversal in an uptrend. The pattern provides an early indication the bullish sentiment may be ending and traders should watch for bearish confirmation after an evening star pattern to time entries for short positions.

Morning Star and Evening Star Candlestick Pattern

The opposite of the evening star is the morning star candlestick pattern, which is viewed as a bullish indicator. The morning and evening star candlestick pattern are similar chart patterns; the only difference is that the morning star pattern is the inverse version of the evening star.

How To Identify an Evening Star On Forex Charts

Now that you know what is evening star candlestick it’s easier to identify this candle pattern on a price chart.

Specifically, on the daily chart the candlestick evening star pattern consist of three daily candlesticks:

1. The first candle is a large bullish candle that continues an upward trend.
2. The second candle is a small-bodied candle or Doji star pattern. This shows indecision in the market after the uptrend.
3. The third candle is a large bearish candle that turns the trend downward. This signifies the bears have taken over.

Day 1 - Upward Momentum

The first candle of all candlestick patterns evening star is a tall bullish candle that continues an established uptrend. This shows strong buying pressure (see the evening star candlestick chart below).

Day 2 - Hesitation

The middle candle is a narrow range candle that looks like the evening star Doji candlestick, either bullish or bearish, that gaps up from the first candle but doesn't advance much. This demonstrates fading momentum. However, since gaps rarely occur in the Forex market, the gap up is not a necessary condition for a valid evening star candlestick reversal pattern.

Day 3 - Reversal

The third candle gaps down from the middle candle and is a tall bearish candle that turns the trend downward showing that the bulls have lost control to the bears.

Evening Star Candlestick Formation - Elements to Consider

Key elements to recognize in a candlestick pattern evening star:

• Previous Day's Uptrend - The first candle should continue the bullish trend from the previous day's market opens and close higher.
• Large White Candle - The first candle should be a long white candle (or green) showing strong buying pressure.
• Star Patterns - The middle candle is the evening star, which gaps up but has a small real body like a Doji or spinning top.
• Evening Doji Star - An evening Doji star candlestick pattern is ideal as the star portion.
• Bearish Turn - The third candle opens below the star's close and drives downward with a large dark real body.
• Retracement - The third candle closes well into the body of the first candle, retracing the previous advance.
• Gaps - Look for a gap up after the first candle and gap down going into the third candle.
• Notable Volumes - High volume on the first and third candles indicates conviction, while low volume on the middle "star" candle reflects uncertainty.
• Former Support Flipped - If the third candle breaks previous support levels, they can turn into resistance.

The goal is to identify the shift in market psychology through the sequence of evening star candlestick chart pattern and their characteristics, which is why it’s so important to familiarize yourself with the evening star candlestick pattern meaning.

You may also want to practice trading evening star patterns in a risk-free demo account before putting real capital on the line. Platforms like Pepperstone offer demo accounts with virtual funds so traders can test out strategies.

Evening Star Candlestick Types

The bearish evening star candlestick pattern is a three-candle reversal pattern, but the specific shape of the middle candle can influence the reliability of the signal. Traders should understand the main types of evening stars:

Standard Evening Star:

The middle candle is a small real body that gaps higher. This creates a star shape and indicates indecision after the uptrend.

Evening Star Doji:

The middle candle is a doji, which has little to no real body. This highlights the tug-of-war between buyers and sellers.

Evening Star Spinning Top:

The middle candle is a spinning top with a small real body and bigger upper and lower shadows. This also reflects market indecision.

The Doji and spinning top versions are considered more reliable than the standard evening star because the smaller middle candle shows a clearer loss of momentum after the strong uptrend.

Abandoned Baby Evening Star:

This is an even more powerful version with a larger gap between the first and second candles. The "abandoned baby" gap confirms traders have abandoned the uptrend.

Being aware of these variations can help traders evaluate the robustness of an evening star signal. The pattern is strongest when accompanied by a doji or spinning top, indicating clear indecision and reversal potential.

Overall, comprehending the evening star candlestick pattern meaning behind its different types allows traders to better anticipate trend reversals.

How To Trade Evening Star Candlestick Pattern

When the evening star formation appears on a chart, it can alert technically-minded traders to a potential trading opportunity. However, effectively capitalizing on this type of chart patterns requires an action plan.

Here are some tips for trading the evening star Doji candlestick pattern:

• Wait for bearish confirmation on the third candlestick to indicate the reversal is underway. Don't take trades on the pattern alone.
• Place a stop loss order above the high of the doji candle when entering a short position after bearish confirmation.
• Target initial profit-taking at support levels or Fibonacci retracements once the downward price movement progresses.
• Be aware of the larger trend context. Reversals are more likely at market tops and downtrends.
• The evening doji star candlestick won't always lead to sustained sell-offs – use prudent risk management for this bearish candlestick pattern.

How Reliable Is the Evening Star In Forex Trading

Like any chart formation, the evening star has its limitations. Performance statistics suggest the pattern predicts impending trend reversals with a success rate around 65-70%. This means it fails to accurately forecast a down move 30-35% of the time.

When viewed in isolation, the bearish evening star candlestick may seem like a reliable bearish reversal indicator. But how truly dependable is this candlestick pattern for forex traders?

False signals can occur for reasons like:

• The middle candle is too large, rather than a small doji or spinning top
• Volume is declining as the pattern forms, instead of rising
• The pattern appears too early within a strong uptrend
• Overhead resistance levels are absent near the pattern