Morning Stars: How to Trade the Morning Star Candlestick Pattern

Successful traders frequently monitor the price charts for signs of candlestick pattern formations. Candlestick patterns are unique formations of price candles that provide insights into market sentiment. The morning star pattern is one of many candlestick patterns that provide reliable trading signals. 

However, spotting candlestick patterns like the morning star is not easy. You not only need the skill and knowledge but also require the right charting tool. On the Samco Trading App, you can find TradingView charts, one of the best charting tools known to traders. TradingView charts let you customise the appearance of candlestick charts for all kinds of assets, allowing you to spot even the most complex price patterns easily. 

Let us now explore the morning star candlestick pattern and its different types, understand its significance, and learn how to trade them. 

What is the Morning Star Candlestick Pattern? 

The morning star pattern is a three-candle pattern that appears near the end of a downtrend and often leads to a shift in the market trend from bearish to bullish. The pattern is named as such since it indicates the potential start of a new uptrend, similar to how the morning star indicates the dawn of a new day. 

The visual appearance of the three-candle morning star on the price charts of an asset indicates that the bears who were in strong control are losing their grip and the bulls are stepping in to push the prices upward. It is one of the most useful and valuable patterns for traders looking to exit short positions or initiate new long positions.    

Features of the Morning Star Candlestick Pattern 

The morning star candlestick pattern has several key characteristics that make it easy to distinguish it from other patterns. Here is an overview of how the pattern presents itself on the price charts. 

• First Candle

The first candle of the morning star pattern is a long bearish candle. The bearish candle can either have upper and lower wicks or no wicks. This represents the continuation of the existing downtrend. 

• Second Candle

The second candle gaps down from the first candle and has a small body. Depending on the market conditions, it can either be bullish or bearish. The small body of the second candle, despite the strong gap down opening, indicates uncertainty in the market and a possible shift in the market sentiment. 

Note: In some cases, the second candle appears as a doji. This particular variant is known as the doji morning star candlestick pattern. 

• Third Candle

The third candle of the morning star candlestick pattern is a large bullish candle with upper and lower wicks or no wicks. The final candle gaps up relative to the second candle and closes around or above the midpoint of the first candle.

Significance of the Morning Star Candlestick Pattern 

The morning star pattern is a reflection of the market sentiment. It shows the transition from bears to bulls over three trading periods. However, for the pattern to be significant it must be formed after a clear or prolonged downtrend. It holds little to no importance if it appears during a sideways or upward-trending market.

In addition to being a bullish reversal indicator, the morning star also serves as a support-level confirmation tool. For instance, the lowest point of the pattern acts as the immediate support level and can be used as a reference when setting stop-loss orders.

How to Trade the Morning Star Candlestick Pattern? 

When attempting to trade the morning star pattern, there are three things you need to get right: the entry point, the stop-loss point, and the exit point. Placing trades at the right points can help you maximise profitability and significantly minimise the risk. Here is how you can approach the trade.

• Entry Point 

The third candle of the morning star effectively acts as the confirmation candle. When entering a long position based on the pattern, wait until the final candle fully closes. The final candle must be bullish and close well above the midpoint of the first candle. The higher up this candle closes, the more reliable the signal. 

Also, remember to monitor the trading volume during the formation of the third candle. The volume must increase rapidly, which suggests strong buying pressure and adds to the credibility of the trend reversal. For additional confirmation, you can also use technical indicators like the Relative Strength Index (RSI), which must show oversold conditions. 

• Stop-Loss Point

Stop-loss orders can help limit losses if the trend reversal fails. When placing a stop-loss consider setting it below the lowest point of the morning star pattern. As you have already seen, the lowest point acts as the nearest support level, which is the ideal point for the stop-loss order. 

Alternatively, you may also look for other support levels that could serve as natural stop-loss points. If you wish to adopt a more conservative approach, you may place the stop-loss just below the lowest point of the third candle.

• Exit Point

Exiting the trade at the right time is equally crucial as knowing when to enter. When trading the morning star candlestick pattern, the ideal point of exit can be determined using the Fibonacci retracement levels. Key Fibonacci retracement levels such as 61.8% or 78.6% from the downtrend could be potential profit targets.

Alternatively, you can also set the exit point at or near key resistance levels above the pattern. When placing an exit trade, remember to use trailing stops. A trailing stop order moves up as the price rises. This allows you to capture more of the uptrend while protecting the profits you earn.

What is the Evening Star Candlestick Pattern? 

The morning star pattern has a counterpart known as the evening star, which is a bearish reversal candlestick pattern that appears during uptrends.

The evening star is also a three-candle pattern comprising a large bullish candle, followed by a bullish or a bearish small body candle, and a final bearish candle. The appearance of the evening star is often succeeded by a shift in the trend from bullish to bearish.

Conclusion

The morning and evening star candlestick patterns are reliable reversal patterns that can help give you insights into the market psychology and predict price movements. The morning star, especially, is a bullish trend reversal pattern that forms after a prolonged or sharp downturn. 

Now, it is important to remember that the pattern has different variants like the doji morning star candlestick pattern. Irrespective of the variant, the resulting price movement is likely to be the same - a shift in the trend from bearish to bullish. 

Although the morning star pattern is often reliable, it is advisable to interpret it in conjunction with other technical indicators. This way, you can significantly increase the accuracy of the trading signals produced by the candlestick pattern.