The Morning Star candlestick is a three-candle pattern that signals a potential market reversal and can be utilized in forex trading or other financial markets. Accurately identifying reversals is crucial in trading as it allows traders to enter positions at optimal levels at the early stages of a possible trend reversal.
This article covers the following key points:
- What is a Morning Star candlestick?
- How to Identify a Morning Star on forex charts
- How to trade the Morning Star pattern effectively
- Assessing the reliability of the Morning Star in forex trading
What is a Morning Star Candlestick?
The Morning Star pattern is a three-candle, bullish reversal candlestick formation that emerges at the bottom of a downtrend. This pattern indicates a deceleration in downward momentum, followed by a significant bullish move, which lays the groundwork for a potential new uptrend.
Components of the Morning Star Pattern:
• Morning Star
• Morning Star Doji
Traders often seek signs of market indecision, where selling pressure diminishes, leaving the market relatively flat. This phase is typically where Doji candles appear, characterized by the market opening and closing at the same level, or very close to it. This indecision signals the potential for a bullish move, as bulls perceive value at this level and prevent further selling. The subsequent appearance of a bullish candle after the Doji provides strong confirmation of the reversal.
What about the Evening Star?
The bearish counterpart to the Morning Star is the Evening Star, a pattern that signifies a potential turning point in an uptrend (bearish reversal pattern). The analysis applied to the Morning Star can be mirrored for the Evening Star; however, the implications and direction are opposite.
How to Identify a Morning Star on Forex Charts
Identifying the Morning Star on forex charts requires more than just spotting the three primary candles. A comprehensive understanding of previous price action and the context in which the pattern forms within the existing trend is crucial.
1. Establish an Existing Downtrend: The market should be displaying lower highs and lower lows, confirming a downtrend.
2. Large Bearish Candle: The first candle is a large bearish candle, reflecting significant selling pressure and continuation of the current downtrend. At this stage, traders should primarily consider short trades, as there is no indication of a reversal yet.
3. Small Bearish/Bullish Candle: The second candle is a smaller one—sometimes a Doji—that signals the first sign of a weakening downtrend. This candle often gaps lower, making a lower low. The candle’s color (bearish or bullish) is less important; what matters is the market’s indecision.
4. Large Bullish Candle: The third candle, a large bullish one, is the first clear sign of new buying pressure. In non-forex markets, this candle often gaps up from the previous candle’s close, signaling the start of a new uptrend.
5. Subsequent Price Action: Following a successful reversal, traders will observe higher highs and higher lows. However, it’s essential to manage the risk of a failed reversal by using well-placed stop-loss orders.
How to Trade the Morning Star Pattern
The Morning Star pattern can be identified on the EUR/GBP chart below, where an established downtrend precedes the formation of this reversal pattern.
Upon observing the completed formation, traders can consider entering a position at the open of the next candle. More conservative traders might prefer to wait for further confirmation by allowing price action to move higher before entering. However, the risk of this approach is that the entry may occur at a less favorable level, particularly in fast-moving markets.
Targets should be set at previous levels of resistance or areas of prior consolidation. Stop-loss orders can be placed below the recent swing low, as a break below this level would invalidate the reversal pattern. Given the inherent uncertainty in the forex market, traders should always employ sound risk management practices and maintain a positive risk-to-reward ratio.
When trading the Morning Star in forex markets, it’s important to note that prices rarely gap as they do in stock markets. Consequently, the three-candle pattern typically opens very close to the previous closing level.
How reliable is the Morning Star in forex trading?
The Morning Star, like most candlestick patterns, should be assessed in line with the current trend and whether there is supporting evidence in favour of the trade, when looking at an indicator. Below are the advantages and limitations of the Morning Star pattern:
| Advantages | Limitations |
|---|---|
| Occurs frequently in the forex market | A failed reversal is possible and price could move further down |
| The pattern presents well-defined entry and stop levels | |
| Morning Stars are easy to identify |
