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What is an Evening Star?

What is an Evening Star?
janegood categorie-icon time-icon2 months ago
Answer for: What is an Evening Star?
Justin Freeman time-icon2 months ago

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 Star

The 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 Interpretation

An 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 Stars

Compared 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.

Context

An 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.

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