Evening star pattern: what is it and what does it mean?

The evening star pattern is a crucial concept in trading, especially for beginners. Understanding this candlestick pattern can help traders identify potential reversals in the market, making it an essential tool for anyone looking to make informed trading decisions.

evening star chart pattern

What is an evening star in trading?

The evening star is formed by three candles:

  • A long bullish candle
  • Small-bodied candle (either colour)
  • A third bearish candle.
evening star pattern candlestick

The evening star pattern occurs after a previous bullish trend, with a gap between the long bullish candle and the second candle. It doesn't matter whether this second candle is bullish or bearish, but it has to be a short candle. The third candle opens below the second candle and will close below the average of the first candle.

  • Pattern: Reversal.
  • Trend: Bearish.
  • Reliability: High.

This pattern is rare, but is considered quite reliable by traders. When it forms, it signals a change of trend, from bullish to bearish.

In other words, in a bullish trend in which the market is rising, the evening star offers clues to traders that the rise could be coming to an end and start to fall.

It is a pattern that can form in any market, including stocks, indices, currencies, commodities, bonds, cryptocurrencies, etc.

However, just like with any other technical tool, it's always a good idea to complement your trading strategy with other tools and indicators before making a decision.

How does an evening star work?

The evening star pattern is formed by 3 candles:

  1. The market is in a bullish trend, so it is rising and we are witnessing a sequence of increasing highs and lows. Suddenly, in the final stretch of the bullish trend, 3 candles appear.
  2. The first candle is bullish and closes near the highs. It is a candle with a large body.
  3. The second candle has a small body, it doesn't matter whether it is bullish or bearish.
  4. The third candle is bearish and its body is also large. The closing of the candle occurs below the middle level of the first candle and is a clear sign that traders are selling.

When does an evening star usually appear?

The evening star pattern appears during a bullish trend.

What is the psychology behind an evening star?

Since the market is rising because it is within a bullish trend, the first candle of the pattern is bullish or green.

The second candle shows indecision, either for technical reasons -it reaches a resistance level- or fundamental reasons – some company news has just been released. This is a candle with a very small body and with this candle, the market stops rising.

This indecision ends bears winning, reversing the bullish trend.

How to trade an evening star in trading?

Here are two ways of incorporating evening star patterns in your strategy:

Conservative approach

First, to limit your risk, you need to wait for the three candles to form. Then, you should wait for the subsequent bearish candles to confirm the trend.

The advantage of this approach is that false trend change signals are avoided. However, as you wait, you may incur a loss if the price drops quickly. However, you could adjust your stop-loss order to mitigate this risk.

In general, you can wait for 3-4 candles to confirm the trend change.

Riskier approach

Most traders wait for the pattern to form and then sell (or short-sell) the asset right at the opening of the fourth candle. As with the other approach, you should clearly define your stop-loss levels to mitigate any risks – especially to avoid a false signal.

Example of evening star and trend change

In the following chart, we have a simple example of the evening star pattern.

evening star pattern candlestick

And indeed, the pattern requirements are met:

  1. The market is rising.
  2. An upward candle with a large body appears.
  3. The next candle is small.
  4. The next candle is bearish with a large body.
  5. The market turns from bullish to bearish.

Here is how to incorporate this into your strategy:

* If your appetite for risk is low, wait for a few several candles – such as, placing the order after 3-4 candles (on the seventh candlestick that confirms the trend reversal).

* If your appetite for risk is higher, you could sell the asset at the beginning of the next candlestick (fourth candle).

Pros and cons of the evening star candlestick pattern

Here are the main advantages and disadvantages of trading based on evening star patterns:

  • Reliability: When correctly identified, it has a high success rate in predicting a bearish reversal.
  • Simplicity: It is easy to identify on a chart.
  • Flexibility: It can be used in different time frames, from daily charts to 1-hour charts or even less.
  • Risk management: Easy to set stop-loss levels.
  • False signals: As with any trading pattern, there can be false signals.
  • Rare: The pattern can be quite rare.

Other three-candle patterns

Summary

In conclusion, the evening star pattern is a technical indicator that suggests a potential shift from a bullish to a bearish trend. It consists of three candles: a lengthy bullish one, a short candle, and a lengthy bearish one. This pattern serves as a cautionary signal for investors and traders. While it is known for its reliability and simplicity, it's crucial to use it in conjunction with other indicators and remain mindful of potential false signals.

FAQs

How should traders use the evening star pattern?

Traders can use the evening star as a signal to consider selling or shorting a security, but it's wise to wait for confirmation from other indicators.

Are there variations of the evening star pattern?

Yes, variations like the “morning star” pattern indicate potential bullish reversals and have a similar structure but in the opposite direction.

Is the evening star pattern reliable for trading decisions?

Yes, it is considered a reliable bearish reversal pattern, but it should be used in conjunction with other indicators for confirmation.

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