What Is an Evening Star Pattern?
An Evening Star is a bearish candlestick pattern consisting of three candles a large white candlestick, a small-bodied candle, and a red candle. It is associated with the top of a price uptrend, signifying that the uptrend is nearing its end.
Example of an Evening Star
What Does the Evening Star Signal?
The Evening Star pattern signals a reversal about to occur in the markets. Think about the direction the sun travels throughout the day, in the morning the sun rises and starts at the bottom of the horizon and by the afternoon or evening its sitting high in the sky. A sun is a star in the sky and this reflects directly into the candlestick patterns. The Evening Star, hence the name evening, has the second (middle) candle being a Doji candlestick that sits above the top close of the first and third candles. This pattern signals a bearish reversal and offers a sign of a bear market about to shape form.
An Evening Star can be a commonly found pattern in charts so you have to make sure you aren’t marking everything off as an evening star. This reversal pattern should be found on a bigger time frame and the middle candle should be reversing downward off of an already known and majorly respected resistance level.
Trading an Evening Star Pattern
Looking at the 1-hour time frame of DJI (Dow Jones Industrial Average Index) we can see a clear as day evening star pattern on this chart. DJI bounced off of the $26,616 level after dipping below this uptrend and eventually found its local high before painting an evening star pattern that signaled the top of the market. This evening star gapped up 500 points from $27,700 to $28,200 before pulling back down below the start of the gap.
Looking again at the 1-hour time frame of DJI (Dow Jones Industrial Average Index) we can see an evening star pattern that isn’t as easy to spot out as the former. DJI bounced off of the $25,800 monthly support level and matched par with the local high at $27,200 before pulling all the way back down to $25,800. The top was signaled solely by the evening star pattern after breaking out above the $26,616 resistance level.
Differences Between the Morning Star and Evening Star
The difference between the morning star and evening star pattern is that the morning star is considered a bullish indicator, while the evening star is considered bearish. The morning star has a middle candle (second candle) that has a peak above the first and third candles, while the evening star has a middle candle that is lower than the first and third candles. The morning star is found at the bottom of the bearish downtrend signaling a bullish reversal, while the evening star is found at the top of the bullish uptrend signaling a bearish reversal.
Limitations of Evening Stars
Trading solely on the basis of finding an evening star in your chart can be very risky. A single evening star found at what you may think will be the top of the uptrend doesn’t necessarily mean that the bullish momentum is over. A morning star is best when it is backed up by a larger time frame and volume as well as it is reversing off of a well-known and respected resistance level.