A Morning Star is a type of Candlestick pattern that illustrates the price action of an asset over a given period. A Morning Star is considered to be an indication of an upcoming reversal in market direction with markets turning from a bearish to a bullish trend.
Structure of a Morning Star
The Morning Star pattern is relatively uncommon and is made up of at least three candlesticks.
- It is preceded by a downwards market trend.
- Candlestick one (left hand side) must be bearish and long enough to suggest strong selling pressure is present in the market.
- There is required to be a gap between the first and second candle. This is a key point.
- The central candlestick is required to be small in size, but the direction/color of the candle is not hugely significant.
- The third candle must be a bullish (green or red) candlestick with minimal upper 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 the 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 Interpretation
A Morning Star formation is taken to signify that a market that has been trending downwards may be about to reverse and trend to the upside. 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 bullish and of considerable length to provide confirmation that a reversal is indeed taking place.
If you have been holding a short position and trading the downwards momentum a Morning Star pattern might encourage you to take profits. You might look to build a position into the reversal to the upside, or at least monitor markets for further confirmation that downward movement is taking place.
Trading Morning Stars
Compared to some other candlestick patterns, Morning Stars are a relatively rare occurrence. It is, however, important that you don’t confuse ‘rare’ with ‘correct’ or ‘accurate’. The reliability, or otherwise of this signal will only be made apparent through the rigorous analysis that forms part of a successful trading strategy. It is particularly important to ensure there is a good strong downward trend prior to the signal being given. Trading a Morning Star pattern in a sideways market is not recommended.
Basing a trading strategy solely off the pattern is probably something 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 process.
A Morning Star pattern that forms over the period of 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.