The Evening Star candlestick pattern: what it means and how to trade it

The evening star candlestick pattern is a three-candle system that gives information about a potential trend reversal. It is commonly used in Contract For Difference (CFDs) and Spread bets in trading stocks, commodities, ETFs and other securities.

Correct spotting of this reversal system is crucial in making valuable financial decisions, and It allows bear traders to enter the market early. This way, they make the most of the market with the market entry at the start of the possible trend reversal.

In this guide, we will discuss the evening star candlestick pattern, how it works, and how to use it if you are conservative or aggressive.

What is an Evening Star candlestick?

The evening star candlestick pattern is a three-candle Japanese candlestick bearish reversal system that appears at the top of a significant uptrend. This pattern slows the upward momentum, laying the foundation for a new downtrend.

This pattern is observed in a candlestick chart of a security price and it is a three-candle system. The first candle represents a significant rise in the asset’s price in the trading session, with the closing price settling far above the open price. This bullish movement represents an overbought by the bull market for that period.

The second candlestick originates the term ‘star’ with its small body and indecision of whether the bulls or bears own the market in that trading session. This candlestick represents the first sign of a weak uptrend, and its opening price is often higher than the preceding long bullish session.

Also, the star candlestick can either be bullish or bearish. It indicates that, at this point, the market is undecided. Therefore, it may continue its uptrend, or a potential long bearish trading session will occur, completing the evening star candlestick pattern.

In addition, the second candlestick may form an Evening Doji Star. Doji stars are formed when the market opens and closes at the same or almost the same level (price). It further gives the bull traders a red flag of a potential trend reversal to stop buying.

Typical of an evening star candlestick, the third candle is a long bearish session with an open price below the open price of the star candle and a closing price below its opening price. Hence, the upward trend has been eliminated, and traders can make entry points from here.

The third candle confirms the complete formation of the evening star pattern (typical with a gap down) and gives a selling signal.

In this pattern, paying more attention to an asset’s closing and opening price is more important than the shadows(wicks) of the candlesticks. The shadows only show the highest and the lowest price of the session. In contrast, the price range indicates the current market owner.

Summarily, this pattern has the virtue of alerting the investor that they are facing a possible change of direction or market trend, from bullish to bearish.

Also, it is a pattern that can appear in any market, so you can take advantage of it when trading in stocks, indices, currencies, commodities, bonds, cryptocurrencies, etc.

Although the evening star candlestick pattern is an interesting technical pattern with acceptable reliability, it is not infallible. Therefore, ideal traders complement this resolution with other indicators and strategies.

How does an Evening Star work?

As previously stated, the pattern of the evening star is formed by three candles that must meet the requirements below:

1. The market is in a bullish trend, so it is rising, and we are witnessing a sequence of increasing highs and lows. Suddenly, three consecutive candles appear in the final stretch of the bullish trend.
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 symptom that traders are selling.

This three-candle system pattern indicates a potential price reversal formation of an upward price trend. It gives a solid indication to traders about the future declination of security price. Therefore, it is worthy of validation with other technical indicators.

If you think you spot a potential declination with an evening star candlestick pattern, we advise you to validate your position. This is because it may also be one of the delusions of the market to instil fear. Traders often use trendlines and other technical indicators to validate their decisions.

What is the psychology behind an Evening Star candlestick?

The intrinsic structure of the evening star candlestick pattern reflects the psychology that this technical pattern encloses.

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

The second candle, either for technical reasons, reaches a resistance or fundamental reasons; some news that shows doubts about the security shows indecision among traders, as it is a candle with a tiny body and with this candle, the market stops rising.

And this indecision ends with the strength of the sellers, who initiate the beginning of the reversal of the good trend that was being carried.

How to Trade the Evening Star candlestick pattern

When trading with the Evening Star, individual trading techniques and views come into play. The evening star candlestick market view occurs in two ways depending on the trader’s profile:

Conservative view

This is ideal for traders whose financial portfolio is conservative. They would identify the three and then wait for a confirmation to give time for the following candles to ratify effectively the market trend change. This way, they can minimise their loss and know whether the candle system is just the usual market delusion.

On the downside, if the market turns out accurate, the investor will sell (or go short) later, so they will not take advantage of the maximum peak of profits.

As seen in the chart above, you can wait 3 to 4 candles to confirm the trend change warning, which announces the formation of a double top that acts as resistance. In any case, the stop loss should be placed just above the evening star candlestick pattern.

Trader vision

It is the classic way of trading the pattern. Traders wait for the three candles to form and Immediately enter the market to go short just after the third candle closes, which is the sizeable bearish body.

That is, you sell at the opening of the fourth candle. Another option would be to sell at the opening of the fourth candle as long as it has occurred below the minimum of the previous candle (the third candle).

In the same way, the stop loss or protection stop is placed above the maximum of the second candle, giving it a certain margin. That is, it is not placed just above the maximum.

Generally, to trade this candlestick pattern, you have to identify it as described above and then apply the steps below to make trading decisions:

1. Identify the evening star candlestick pattern. Knowing that the pattern is a three-candle system, with the first candle a large bullish length, the second appearing relatively small, and the third a long bearish candle.
2. Confirm the pattern with other technical indicators such as trendlines, oscillators, and moving averages.
3. Start trading by going short on the security position. It is essential to place a stop-loss order on your position in case the market reverses.
4. Monitor your evening star pattern entry into the trade closely. You can also set a take-profit order to monitor your exit from the market. However, don’t be greedy with your take-profit order.

Example of an Evening Star candlestick pattern and trend change

The chart below shows a simple example and clarification of the evening star candlestick pattern.

This pattern meets the ideal requirements, it includes:

1. An uptrend market
2. A bullish candle with a large body appears.
3. The next candle is small.
4. The market turns from bullish to bearish
5. The last candle of the pattern is bearish with a large body.

Let’s see where one would sell in each case:

• With the classic view, the trader will sell at the candle’s opening following the pattern, that is, at the opening of the fourth candle.
• With the conservative view, the trader will leave several candles as a margin. That is, traders can sell at the opening of the fourth candle after the pattern, but the trader may decide to sell at the opening of the seventh candle.

Where to trade Evening Star candlestick platform in the UK? List of Best Brokers

If you’re considering accessing financial charts to practice the Evening Star Candle pattern you’ve learnt in this guide, here is the list of best financial brokers that offer access to asset charts and other technical indicators to make financial decisions:

• ActivTrades
• Interactive Broker

1. ActivTrades

ActivTrades is an award-winning, reputable financial platform operating in over 170 countries. The financial platform offers over 1,000 stocks and specialises in spread betting and CFD on Forex, indices, bonds, commodities, indices, and ETFs.

The financial broker operates in the UK according to the stringent regulatory framework of FCA. In addition, it guarantees a cover of up to £85,000 per customer through the Finacial Service Compensation Scheme (FCSC) in case of insolvency.

ActivTrades offers investors several trading platforms, including its proprietary platform (ActivTrader) and third-party platforms like MetaTrader 4. These trading platforms allow traders to view and analyse the chart and, therefore, identify if there is an Evening Star candlestick pattern.

Learn more about ActivTrades from our ActivTrades Broker Review.

2. Interactive Broker

Interactive Broker is a traditional US-based broker with a long track record of success in the financial world. Established 46 years ago, the broker is secure, regulated and authorised by the SEC in the US, FCA in the UK and other regulatory bodies in the countries where it operates.

The broker offers products including Stocks (and fractional shares), Investment funds, ETFs, Bonds, Options, Forex, and commodities across Europe in more than 150 markets, 33 countries, and 23 currencies.

To access the financial world and make profitable decisions on any security, Interactive Broker offers a wide range of proprietary trading platforms to access asset charts and make profitable decisions. The platform includes IBKR Trader Work Station, IBKR Mobile, IBKR GlobalTrader, and IBKR Client Portal.

With these platforms, you can access asset charts and make decisions on the trends.

For more information about the Interactive Broker, check our Interactive Broker Review.

Pros and Cons of Trading with an Evening Star Candlestick

Evening Star pattern is one of the most reliable patterns, but it still has advantages and disadvantages. Let’s see them:

Pros

✅ Reliability: It is a recognised reversal pattern and, when correctly identified, can have a high success rate in predicting a bearish reversal.

✅ Simplicity: It is easy to identify on a chart.

✅ Flexibility: You can identify and use it in different time frames, from daily charts to 1-hour charts or even less.

✅ Risk management: Having a precise reference point (the high of the second candle) makes it easier to set the next resistance levels or stop-loss (in case of going short).

Cons

❌ False signals: As with any trading pattern, there can be false signals.

❌ Context dependence: The pattern is only more reliable when it appears after a clear upward trend.

❌ Variability: There are variations of the Evening Star pattern, and not all are equally effective. For example, the second candle can be a doji, an inverted hammer candle, etc., and each variation has its reliability.

Conclusion

The Evening Star in trading is a technical pattern that indicates a possible trend change from bullish to bearish. Composed of three candles: a long bullish one, a short candle with a gap, and a long bearish one, this pattern is a warning signal for investors. Although it is recognised for its high reliability and simplicity, it is essential to complement it with other indicators and be aware of possible false signals.

FAQs About the Evening Star Candlestick Pattern