An Evening Star is a type of Candlestick pattern that illustrates the price action of an asset over a given length of time. An Evening Star is considered to be an indication of an upcoming reversal in market direction with markets turning from a bullish to a bearish trend.
Structure of an Evening StarThe Evening Star pattern is relatively uncommon and is made up of at least three candlesticks.
- It is preceded by an upwards market trend.Candlestick one (left hand side) must be bullish and long enough to suggest that strong buying pressure is present in the market.
- There is required to be a gap between the first and second candle. That is a key point.
- The central candlestick is required to be small, but the direction/color of the candle is not hugely significant.
- The third candle must be a bearish (red or black) candlestick with minimal lower shadow denoting the closing price was near the low of the time period.
- There are differing views on whether a gap is required between the closing price of candlestick 2 and opening price of candlestick 3. Whilst there are different schools of thought, a gap, if present can be taken as an indication of greater signal strength.
- Most methodologies require the first and third candles to be relatively long in length and the third candle to close near to the center of candle 1.
Meaning and InterpretationAn Evening Star formation is taken to signify that a market that has been trending upwards may be about to reverse and trend to the downside. The gap between candles 1 and 2 is taken as something of a final lunge and the small second candle as a sign of indecision about that lunge being a good idea. Candles 1 and 2 combined suggest the market is stalling. The third candle needs to be bearish and of considerable length to provide confirmation that a reversal is indeed taking place.If you have been holding a long position and trading the upwards momentum an Evening Star pattern might encourage you to take profits. You might look to build a position into the reversal to the downside, or at least monitor markets for further confirmation that downward movement is taking place.
Trading Evening StarsCompared to some other candlestick patterns, Evening Stars are relatively rare. It is important that you don’t confuse ‘rare’ with ‘correct’ or ‘accurate’ though. The reliability, or otherwise of this signal will only become apparent through the rigorous analysis that forms part of a successful trading strategy. It is particularly important to ensure there is a good strong upward trend prior to the signal being given. Trading an Evening Star pattern in a sideways market is not to be recommended.Basing a trading strategy solely off the pattern is best tested in a Demo account. Many other signals, such as traded volumes, trend lines and the Stochastic Oscillator can be incorporated into your decision making.
ContextAn Evening Star pattern that forms over several days is the result of a more widespread amount of market activity than one formed over a period of minutes. As with other Candlestick patterns the longer the time interval associated with the candles, the stronger the signal is considered to be.
A White Candlestick is an illustrative way of reflecting positive Price Action over a given length of time.
StructureThe horizontal bars of a White Candlestick represent the opening and closing prices and the box between the two levels is referred to as the ‘body’ or ‘real body’. A White Candlestick body reflects that over that time period the closing price was above the opening price.The vertical lines represent the range of price action during the period. The highest point of the upper shadow reflects that period’s trading high and the lowest part of the lower shadow reflects the low of the time period.Short shadows denote a price action to have been within a small range, longer shadows denote a greater price range.[It’s worth noting that color choice is arbitrary, and some follow the practice of coloring the bodies of positive candles green instead of white.]
Signal StrengthCandlestick charts are simple in design and present a way to clearly and quickly convey price action. It is also possible to grade the strength of the signal.
- The Candlestick on the far-right hand side is the most ‘Bullish’. It has a long lower shadow that suggests at some part of the trading period bearish traders sold heavily and drove prices down. By the end of the period strong buying pressure had taken the price back above the opening price and continued to make new highs. The closing price being close to the high point of the period suggesting buyers finished the session on top.
UsesCandlesticks are a method of understanding price actions and their use can be extended over all markets and tradeable instruments.Trading strategies based on Technical Analysis take things one step further and might use White Candlesticks as guides to enter into long positions and, or to close out short positions. It should be noted that trading solely off Candlesticks while possibly profitable would not be taking account of other market information that is readily available. Many other signals, such as traded volumes, Pivots and Support and Resistance levels should be incorporated into your strategy to act in conjunction with the candlestick analysis. Moreover, the information is widely available free of charge including from Broker Platforms.
Time PeriodsDifferent time periods can be selected, those typically available range from 1m (one minute) through to 1y (one year) but the design characteristics of the candlestick are constant regardless of the time period or instrument to which they are applied. A White Candlestick formed by data taken over a longer time period is considered to offer a more reliable signal. This is on the basis that more market participants have been involved in generating the buying pressure to make prices rise.
A Candlestick Pattern is when one or more Candlesticks align in a specific way to illustrate a particular kind of price action. As a result Candlestick patterns are seen as useful tools for trading the markets, or at least understanding them better.Candlestick Patterns are many and varied. While there is a whole glossary available, getting a firm understanding of what each pattern is telling you will take your understanding of price action to a more granular level. This prioritizes being able to understand what price action is trying to tell you over being able to identify a particular pattern.The Rising Window pattern represents two time intervals of positive price action. In both candlesticks the closing price is close to the high of the day and also above than the opening price.It’s commonly held to be more significant that the low of the second candlestick is above the high of the preceding candlestick. This creates a GAP which according to Technical Analysis would act as a Support level against selling pressure.The Falling Window Candlestick Pattern applies the same principles but to a falling market.A Bearish Harami is a two candlestick pattern; if preceded by upwards market momentum it is considered to be a signal of bearish activity. The small red candlestick in time period 2 is entirely contained within the body of the green candle of time period 1. After researching Candlestick Patterns in more detail you may adopt the strict definition that Candlestick 2 most be less than 25% of the size of Candlestick 1.
Time PeriodsAn important aspect of Candlestick Patterns is learning how to appreciate the importance of the Candlestick’s time period in relation to your trading decisions. Setting time intervals to different levels presents the same data in a different way and you need to choose a Candlestick time frame that matches your investment time horizon. Put another way, a signal from a 1 minute candle is likely to offer little effective guidance for a trade you are looking to put on and hold for several days.
- Candlestick Patterns are a mine of information.
- Simple in design they can quickly convey a lot of information about the markets.
- Signal strength can be graded with some patterns being seen as stronger signals than others.
- Candlestick Patterns can be used across all instruments and markets.
- They are easy to use in conjunction with other diagnostic tools and market data such as traded volumes
- You might consider Candlestick Patterns useful, but on their own not quite strong enough signals for you to commit capital to a trade.
- All patterns need to be considered in a wider time context. For example, the Bearish Harami pattern is considered to be a medium strength signal that only works following an upwards trend. Basing trades off this pattern in a sideways market being strongly discouraged.
- Changing the time intervals of your candles can also aid your analysis. If you are analyzing a 15 minute Candlestick, then breaking it down into three Candlesticks of 5 minutes each might offer support (or otherwise) to your trading strategy.
A Limit order is an automated instruction to enter into a trade at a pre-determined price. Limit Orders are placed in advance of a price getting to that particular level with the intention of executing at a level that best fits a particular trading strategy.Limit orders are determined by individual traders who then input that information into the Broker Platform they are using. There is then a period of waiting to see if the Limit Order is activated, or not. If a price does not reach the pre-determined level the trade is not executed.The below example demonstrates a Limit Order being set to enter into a Momentum trade using a 1hr time frame.Current Price is 7055Limit Order Instruction: SELLLimit Order Price: 7069dropSource: IG Index 20181114With indicators advising momentum is to the downside the trader is looking to enter into a Short position, but the question is where? They enter a Sell Limit Order with a price of 7069 which is in line with the upcoming Resistance level, the Weighted Moving Average (100). Two of the last three candles have been very bullish which increases the risk that a trend reversal is about to happen, which would mean momentum switching from bearish to bullish, or at least to sideways. However, the trading volumes chart at the bottom of the illustration does not show significant upticks in volume suggesting the very recent price action to the upside might not be widely supported.Entering into the trade at the higher price of 7069 would not only maximize returns should the momentum continue to the downside but would also minimize losses if the market momentum has indeed actually turned and goes on to hit the Stop Loss order.Source: IG Index 20181114One hour later we can see the Limit Order price of 7069 was just touched (upper shadow of red candle, above) and the Short position taken. Price is currently 7059.3 representing an unrealized profit.
- The automated nature is a big advantage, especially if you want to trade when you are without direct access to the markets.
- Limit orders also free up your time as you are not concentrating on trade execution.
- A disciplined approach to applying trading strategies is always a good thing. Limit orders help you build a trading environment that is based on analytics rather than emotions.
- Using Limit Orders can obviously mean you might not enter into a trade. That can be frustrating if post-trade analysis shows that the trade would have been profitable if you had just got into it at less optimal levels. It would be prudent, however, to devote time to re-evaluating your trading strategy (specifically trade entry points) rather than your trade execution policy.
- As with Stop Losses news events such as the release of economic data, although running to fixed schedules, can still create momentary periods of abnormally high price volatility and a whip-sawing price action. Until the market digests the news spikes in prices can hit Limit Order and it would be important to consider if you find the chance of getting into a trade to be of benefit
A Stop Loss order is an automated instruction to liquidate a position at a specific price. They are placed in advance of a price moving towards that particular level with the intention of limiting losses on trades that turn bad.Stop losses are determined by individual traders who then input that information into the Broker Platform they are using. The Broker will then enter an instruction into the market to automatically execute the referenced price level. In certain market conditions it can be hard to actually execute trades and Stop Losses may be subject to Gapping Risk. As a result you may want to consider the cost/benefit of using Guaranteed Stop Losses or at least ensure you are familiar with the Terms and Conditions of your broker.Taking the below price chart in Gold CFD. Using a 15min time interval and Opening Range Breakout strategy the trader sells short at 1200.08. The Stop Loss is set at 1202.00, which is just above the high of the day, 1201.70. If the price turns bullish and reaches 1202.00 then the trade will automatically close out. A Stop Loss on a long position would be below the entry price level.Each trading strategy (such as Fading or Scalping) has its own approach to where Stop Losses should be set. Stop Losses should be determined during the research stage, not the trading stage of your trade’s life.
- The automated nature is a big advantage, especially with markets that trade overnight.
- It also creates a more disciplined approach to applying you trading strategies as it would take manual intervention to override/cancel a Stop Loss that is put on at the time of a trade.
- Stop Losses should not be adjusted away from price action to try to keep a trade alive. That can lead to significant losses and instead take the hit and spend time evaluating your trading strategies.
- Moving stop losses to follow a profitable trade is a commonly used trading tool. Trailing Stop Losses can ensure that a once profitable trade makes a small profit or at least breaks even should the market turn. Trading Momentum based trading strategies might involve selling part of a profitable position but leaving the rest to run. The realized profits then set off against the Stop Loss that remains at the original level.
ConsWhile it is strongly recommended that you do use Stop Losses there are some situations where you might consider taking them off, maybe even momentarily:
- News events such as the release of economic data, although running to fixed schedules, can still create momentary periods of abnormally high price volatility. A whip-sawing action is possible until the market digests the new, and these spikes in prices can hit stop losses and close positions out at a loss. As a result some traders take stop losses off around significant releases such as Non-Farm Payroll announcements and re-enter them once the price action becomes less volatile.
- Consideration will also be given to longer term changes to market conditions. For example, if price volatility is high and reaches 4% then Stop Losses set based on price volatility levels of 2% would be more likely to be triggered.
A Bearish Belt Hold candlestick pattern is an illustrative way of reflecting Price Action over a given period. It is seen as an indicator that the market trend is turning from being bullish to bearish.
StructureThe Bearish Belt Hold pattern is relatively easy to identify.
- It is preceded by an upwards market trend.
- The Bearish Belt Hold candle (with red or black body color according to your preference) must occur after a run of bullish candles.
- The Bearish Belt Hold candle should be relatively larger than the preceding candles.
- It should have a short lower shadow or no shadow at all.
- The opening price is also the high price for the day.
Signal StrengthBearish Belt Hold candles are a pattern that is relatively easy to spot, and it occurs relatively frequently. You will likely gain more benefit from the pattern by devoting time to gaining an understanding of how to grade the strength of the signal:
- The longer the candle the stronger the signal
- The signal is confirmed by the candle for the subsequent time period also being bearish (as shown in the below chart)
UsesBearish Belt Hold candlestick patterns are not considered to be the most reliable indicator of future price action.
- Your use of them might be tempered by the fact that even patterns that meet all the above criteria turn out to be incorrect. Testing any strategy based on Bearish Belt Holds is best done in a Demo account or in very small size.
- You may find that using them in conjunction with other indicators does lead to a profitable strategy.
- A Bullish Belt Hold candlestick pattern formed by data taken over longer time periods is considered to offer a more reliable signal on the basis that more market participants have been involved in generating the selling pressure and bring about a downward trend.
Uncertainty can be a major influence on the performance of stock markets. If investors become nervous about a particular sector in the market, then a sell-off can result and the price of shares will fall. That in turn creates more uncertainty and further selling will take place causing prices to drop further.Major price fluctuations in stocks and shares are also caused by news announcements that prompt investors to either buy or sell their holdings. They can be about the fortunes of individual companies, the chancellor’s budget speech, the health of national economies, world economic recession or major unforeseen global events.The release of news that is seen to impact a particular company’s fundamental valuation negatively will almost certainly cause its share price to fall. A company that distributes quarterly performance reports to the public is likely to see the price of its stock fall on the announcement date if the figures in the released reports are poorer than what the market and shareholders were anticipating. As reporting dates are known in advance, price volatility can be expected around those days as projected and actual returns are compared.Other events that are more random but are still specific to a particular stock might impact the price at any time. Events of a more unforeseeable nature could range from the sudden announcement that the CEO has departed to news breaking about failures relating to a particular product.Shares will also fall in price if the market as a whole is experiencing a sell-off. International level news events such as the announcement of an escalating trade-war between major economies could be interpreted as being bad for the economy of a particular country. As a result, that market is likely to lose value.Sub-sectors within an economy might experience specific losses according to changes of government policy; for example, housebuilders and real estate brokers can see their share price fall upon announcements that taxes on property transactions are to increase dramatically. Even during market-wide sell-offs the relative performance of the different sectors is a subject worth studying to gain a clearer understanding of the nature of markets.If you are keenly monitoring your portfolio and you can’t reconcile a price move, then bear in mind the possibility that a stock price might have moved due to some kind of Corporate Action. From Dividend Ex-Date onwards buyers of a stock are not entitled to receive any announced dividend. If the dividend is 20p in value, then the buyers will adjust their prices down by that amount and the stock will trade at that lower level.It is worth noting that typically stocks rise gradually and fall suddenly, the below graph of the Dow Jones Index price is taken from www.markets.com and shows a big down day (long red candle) on 10/10/2018 which demonstrates this point. Sell-offs, stock market crashes, and what more optimistic commentators refer to as ‘realignments’ are more dramatic in nature than the gradual rise associated with rising markets. That often makes falling stock prices appear more newsworthy and is therefore more likely to bring your investment portfolio to the front of your mind. But when stocks are falling it is worth recalling your investment aims and the investment strategies you are using to attain them.Losses on long positions can be limited through the use of stop losses, and by flipping things around and selling short the market is a way to make a profit from downward market moves. Importantly a lot of investment strategies regard downward market corrections as an opportunity to buy at lower levels.