Star in Trading - Morning & Evening

The Morning Star

The morning star is a bullish candlestick pattern which evolves over a three day period. It is a downtrend reversal pattern. The pattern is formed by combining 3 consecutive candlesticks. The morning star appears at the bottom end of a down trend. In the chart below the morning star is encircled.

The morning star pattern involves 3 candlesticks sequenced in a particular order. The pattern is encircled in the chart above. The thought process behind the morning star is as follow:

1. Market is in a downtrend placing the bears in absolute control. Market makes successive new lows during this period
2. On day 1 of the pattern (P1), as expected the market makes a new low and forms a long red candle. The large red candle shows selling acceleration
3. On day 2 of the pattern (P2) the bears show dominance with a gap down opening. This reaffirms the position of the bears
4. After the gap down opening, nothing much happens during the day (P2) resulting in either a doji or a spinning top. Note the presence of doji/spinning top represents indecision in the market
5. The occurrence of a doji/spinning sets in a bit of restlessness within the bears, as they would have otherwise expected another down day especially in the backdrop of a promising gap down opening
6. On the third day of the pattern (P3) the market/stock opens with a gap up followed by a blue candle which manages to close above P1’s red candle opening
7. In the absence of P2’s doji/spinning top it would have appeared as though P1 and P3 formed a bullish engulfing pattern
8. P3 is where all the action unfolds. On the gap up opening itself the bears would have been a bit jittery. Encouraged by the gap up opening buying persists through the day, so much so that it manages to recover all the losses of P1
9. The expectation is that the bullishness on P3 is likely to continue over the next few trading sessions and hence one should look at buying opportunities in the market

Unlike the single and two candlestick patterns, both the risk taker and the risk averse trader can initiate the trade on P3 itself. Waiting for a confirmation on the 4th day may not be necessary while trading based on a morning star pattern.

The long trade setup for a morning star would be as follows:

1. Initiate a long trade at the close of P3 (around 3:20PM) after ensuring that P1, P2, and P3 together form a morning star
2. To validate the formation of a morning star on P3 the following conditions should satisfy:
   1. P1 should be a red candle
   2. With a gap down opening, P2 should be either a doji or a spinning top
   3. P3 opening should be a gap up, plus the current market price at 3:20 PM should be higher than the opening of P1
3. The lowest low in the pattern would act as a stop loss for the trade

The evening star

The evening star is the last candlestick pattern that we would learn in this module.

The evening star is a bearish equivalent of the morning star. The evening star appears at the top end of an uptrend. Like the morning star, the evening star is a three candle formation and evolves over three trading sessions.

The reasons to go short on an evening star are as follows:

1. The market is in an uptrend placing the bulls in absolute control
2. During an uptrend the market/stock makes new highs
3. On the first day of the pattern (P1), as expected the market opens high, makes a new high and closes near the high point of the day. The long blue candle formed on day 1 (P1) shows buying acceleration
4. On the 2nd day of the pattern (P2) the market opens with a gap reconfirming the bull’s stance in the market. However after the encouraging open the market/stock does not move and closes by forming a doji/spinning top. The closing on P2 sets in a bit of panic for bulls
5. On the 3rd day of the pattern (P3), the market opens gap down and progresses into a red candle. The long red candle indicates that the sellers are taking control. The price action on P3 sets the bulls in panic
6. The expectation is that the bulls will continue to panic and hence the bearishness will continue over the next few trading session. Therefore one should look at shorting opportunities

The trade setup for an evening star is as follows:

1. Short the stock on P3, around the close of 3:20 PM after validating that P1 to P3 form an evening star
2. To validate the evening star formation on day 3, one has to evaluate the following:
   1. P1 should be a blue candle
   2. P2 should be a doji or a spinning top with a gap up opening
   3. P3 should be a red candle with a gap down opening. The current market price at 3:20PM on P3 should be lower than the opening price of P1
3. Both risk taker and risk averse can initiate the trade on P3
4. The stop loss for the trade will be the highest high of P1, P2, and P3.

Module 2