What Is a Morning Star Pattern?
A Morning Star is a sign of hope in a market downtrend consisting of three candles: one short-bodied candle wedged between a long red and long green candle. It signals that the selling pressure of the first day is subsiding and a bull market is on the way.
Example of a Morning Star
What Does the Morning Star Signal?
The Morning 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 Morning Star, hence the name morning, has the second (middle) candle being a Doji candlestick that sits below the bottom close of the first and third candles. This pattern signals a bullish reversal and offers a sign of hope in a market downtrend.
A Morning Star can be a commonly found pattern in charts so you have to make sure you aren’t marking everything off as a morning star. This reversal pattern should be found on a bigger time frame and the middle candle should be reversing upwards at an already known support level.
Trading a Morning Star Pattern
Looking at this S&P chart on a 1-hour time frame we see a downtrend followed by an uptrend with the reversal pattern being a morning star. Found at the bottom of a downtrend, the morning star indicates a trend reversal to the upside. The morning star signaled at just above $320, the reversal move ended up hitting $363.
Looking at this chart of WKHS on a 4-hour time frame we see a downtrend that got reversed by a morning star and is forming a rounding bottom on its way upwards. The morning star signaled a reversal at $15 and now the current Spot trading price is a little over $27.
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 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 Morning Stars
Trading solely on the basis of finding a morning star in your chart can be very risky. A single morning star found at what you may think will be the bottom of the downtrend doesn’t necessarily mean that the bearish 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 support level.