The Evening Star candlestick is a three-candle pattern that signals a potential market reversal and is frequently utilized in forex trading. Accurately identifying reversals is crucial in trading as it enables 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 an Evening Star candlestick?
- How to Identify an Evening Star on forex charts
- How to trade the Evening Star candlestick pattern
- Assessing the reliability of the Evening Star in forex trading
What is an Evening Star Candlestick?
The Evening Star pattern is a three-candle, bearish reversal candlestick formation that appears at the top of an uptrend. This pattern indicates a slowdown in upward momentum, followed by a bearish move that sets the stage for a potential new downtrend.
How to Identify an Evening Star on Forex Charts
Identifying the Evening Star on forex charts requires more than just recognizing the three primary candles. A comprehensive understanding of the preceding price action and the context in which the pattern emerges within the existing trend is essential.
1. Establish an Existing Uptrend: The market should be displaying higher highs and higher lows, confirming an uptrend.
2. Large Bullish Candle: The first candle is a large bullish candle, reflecting significant buying pressure and the continuation of the uptrend. At this stage, traders should primarily consider long 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 uptrend. This candle often gaps higher, making a higher high. The candle’s color (bearish or bullish) is less important; what matters is the market’s indecision.
4. Large Bearish Candle: The third candle, a large bearish one, is the first clear sign of new selling pressure. In non-forex markets, this candle often gaps down from the previous candle’s close, signaling the start of a new downtrend.
5. Subsequent Price Action: After a successful reversal, traders will observe lower highs and lower lows. However, it’s essential to manage the risk of a failed reversal by using well-placed stop-loss orders.
Bearish Evening Star Candle Formation
Traders often seek signs of market indecision, where buying pressure diminishes, leaving the market relatively flat. This situation is ideal for the appearance of a Doji candle.
Evening Star Doji
Doji candles can be identified when the market opens and closes at the same level, or very close to it. This indecision paves the way for a bearish move, as bears perceive value at this level and prevent further buying. The appearance of a bearish candle following the Doji provides strong confirmation of the reversal.
What about the Morning Star?
The bullish counterpart to the Evening Star is the Morning Star, a pattern that signifies a potential turning point in a downtrend (bullish reversal pattern). The analysis applied to the Evening Star can be mirrored for the Morning Star, but the implications and direction are opposite.
How to Trade the Evening Star Candlestick Pattern
The Evening Star pattern can be identified on the EUR/GBP chart below, where an established uptrend 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 lower 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 support or areas of prior consolidation. Stop-loss orders can be placed above the recent swing high, as a break above 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 Evening 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 Evening Star in Forex Trading?
The reliability of the Evening Star pattern, like most candlestick patterns, should be evaluated within the context of the prevailing trend and supported by additional indicators that align with the trade. Below are the advantages and limitations of the Evening Star pattern:
| Advantages | Limitations |
|---|---|
| Occurs frequently in the forex market | A failed reversal is possible, and price could move further up |
| The pattern presents well-defined entry and exit levels | |
| Evening Stars are easy to identify |
