The morning star pattern is a crucial tool in the world of trading, especially for beginners. It's a candlestick pattern that can signal potential bullish reversals in the market. In this article, we'll provide a beginner-friendly introduction to the morning star pattern, explaining what it is and how to identify it.
What is a morning star in trading?
The morning star is a pattern formed by three candlesticks that form after a downtrend, and it indicates the beginning of an upward trend.
- Pattern: Reversal.
- Trend: Bullish.
- Reliability: High.
This pattern is represented by a long bearish candle (red), a middle candle that indicates a moment of indecision (bears start to lose ground), and a third candle that confirms the reversal and marks the uptrend (green candlestick).
The morning star pattern serves as a vital technical indicator, alerting traders to potential shifts in market direction, from a bearish trend to a bullish one.
Comprising three candles and typically occurring at the conclusion of a downtrend, this versatile pattern can be applied across various markets, including stocks, indices, currencies, and more.
However, it's important to note that while it boasts a respectable degree of reliability, it is not infallible. Consequently, traders are advised to complement it with other technical signals, such as support levels, Fibonacci levels, moving averages, and oversold indicators, to confirm its indications and minimise the risk of false signals.
How does a morning star work?
The morning star pattern is formed by 3 candles:
- The market is in a downtrend, so it is falling, and this can be easily observed because the highs and lows are decreasing. In the final stretch of the downtrend, 3 consecutive candles appear.
- The first candle is bearish and closes near the lows. It is a candle with a large body.
- The second candle is small, it doesn't matter whether it is bullish or bearish, although it is usually a doji, that is, a candle shaped like a cross because the opening price and the closing price are the same or almost the same. Therefore, this candle is transitional.
- The third candle is bullish, and its body is also large. The closing price occurs above the middle level of the first candle and is a clear sign that bulls are winning.
When does a morning star usually appear?
The morning star pattern appears at the end of a downtrend.
What is the psychology behind a morning star?
Since the market is falling because it is within a downtrend, it is normal for the first candle of the pattern to be bearish.
What happens is that the second candle suddenly shows indecision among traders, as it is a classic doji or very similar to it – it is not an indispensable requirement -, and with this candle the market stops falling.
With the third candle, we witness the trend change as it is a large and bullish candle.
Therefore, the psychology of this pattern clearly reflects the three phases of a change or trend reversal. First, there is a downtrend; second, there is a pause, a moment of indecision and a clear turning point; third, the beginning of a trend change occurs.
How to trade a morning star?
When trading using the morning star pattern, there are two methods to consider, depending on the trader's profile. Let's explore each of them below:
This method is ideal for traders with a conservative profile. They should wait for all three candles to form and then seek confirmation, allowing subsequent candles to validate the market trend change.
The advantage of this strategy is that it reduces the risk of false trend change signals. However, it may result in entering the market later during a correct trend reversal, potentially missing out on some of the upward movement.
Riskier, active trading
This is the classic way of trading using the morning star pattern. Traders patiently wait for all three candles to form. Immediately after, they enter into the trade, buying right after the bullish third candle with a large body closes. In other words, traders buy at the opening of the fourth candle.
Alternatively, they can buy at the opening of the fourth candle if it opens above the high of the preceding candle (the third candle).
The stop loss or protective stop is positioned below the low of the second candle or the doji, allowing for a certain margin rather than placing it directly below the low price.
This type of strategy carries a slightly higher risk of encountering false signals.
Example of morning star and trend change
In the following chart, we have a very clear example of the morning star pattern:
We see that all the requirements are met:
- The market is falling, it is in a downward trend.
- A bearish candle with a large body appears.
- The next candle is a doji.
- The next candle is bullish with a large body.
- The trend change occurs.
Let's see where we would buy in each case:
- On the conservative side, you would have to leave several candles of margin, that is, you could buy at the opening of the fourth candle after the pattern, that is, the pattern is three candles, so you would buy at the opening of the seventh candle.
- Alternatively, you could buy at the opening of the candle following the pattern, that is, at the opening of the fourth candle.
Pros and cons of incorporating the morning star pattern in your trading strategy
We can list a series of advantages and disadvantages as follows:
- ✅ It is a very simple and straightforward pattern that does not require advanced analysis.
- ✅ It is quite objective, making it quite accurate.
- ✅ Provides clear signals regarding where to buy and where to place the stop loss.
- ✅ Works in any type of market (stocks, indices, currencies, commodities, bonds, cryptocurrencies).
- ✅ In case of a false signal, you could protect yourself with a tight stop loss.
- ❌ Although it is considered a reliable indicator, it is advisable to combine it with other types of tools to avoid false signals.
Other candle patterns
Also, if you are new to technical analysis, don't miss out on our thorough guide on technical analysis.
All in all, the morning star is a technical pattern hat indicates a possible trend change from bearish to bullish. Represented by three candles, this pattern suggests that a bearish trend could be coming to an end. Despite its reliability, it is essential to complement this pattern with other indicators to confirm signals and minimise risks. It is applicable to various markets, from stocks to cryptocurrencies.
How do traders use the morning star pattern for entry and exit points?
Traders often enter a trade when the bullish candle of the pattern closes and set stop-loss levels below the low of the transitional candle or doji.
Can a morning star pattern occur in an uptrend?
No, the morning star pattern is specifically a reversal pattern found at the end of a downtrend, signalling a potential shift to an uptrend.
Are there variations of the morning star pattern?
Yes, there are variations like the evening star, which is its bearish counterpart, signalling a potential reversal from an uptrend to a downtrend.