What is an evening star pattern in trading?
A time comes when the price of an asset you’re trading starts to show signs of changing direction. Whether you’re trading stocks, cryptocurrencies, Forex, or any other assets, the evening star pattern helps traders spot this shift. It appears as three candles on a price chart: first, a big green candle showing strong price gains, followed by a small candle that signals uncertainty, and lastly, a big red candle indicating a potential drop in price. This pattern often forms at the peak of a rising trend, suggesting that the price may soon start to fall.
Example of an evening star pattern
Let's assume you were monitoring Bitcoin price, which is currently trading at $60,000. You notice the Evening Star pattern forming on the chart. First, you see a big green candle, meaning the price is rising strongly. Next, a small candle appears, showing that the price movement is slowing down. Finally, a big red candle shows up, indicating that the price is starting to fall.
This pattern suggests that the uptrend may be ending and that a downtrend could be starting soon. In this case, it might be a signal to consider selling or taking a bearish position.
How an evening star works and how to identify it
How it works:
- First candle: The pattern starts with a large green candle, which shows that the price was rising strongly. This candle indicates that buyers were in control and the price was moving up.
- Second candle: Next, a small green candle appears. The small candle shows that the price movement has slowed down, and there's uncertainty in the market. It suggests that the strong upward trend might be weakening.
- Third candle: Finally, a large red candle follows the small one. This red candle indicates that the price is falling, and sellers are taking over. It confirms that the price trend is shifting from an uptrend to a downtrend.
How to identify it:
- Look for the formation: Check your price chart for the sequence of three candles. The first should be a large green candle, followed by a small green candle , and then a large red candle.
- Check the location: The Evening Star pattern typically forms at the top of an uptrend. This means it appears after a strong price rise, signaling that the uptrend might be ending.
- Confirm the signal: To strengthen the signal, look for additional confirmation, like a decrease in trading volume or other bearish indicators.
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Evening star vs. Morning star pattern
| Aspect | Evening star pattern | Morning star pattern |
|---|---|---|
| Definition | A bearish candlestick pattern indicating a potential price drop. | A bullish candlestick pattern indicating a potential price rise. |
| Formation | Consists of three candles: a large green candle, a small-bodied candle, and a large red candle. | Consists of three candles: a large red candle, a small-bodied candle, and a large green candle. |
| Position in trend | Appears at the top of an uptrend. | Appears at the bottom of a downtrend. |
| First candle | A large green candle showing strong upward movement. | A large red candle showing strong downward movement. |
| Second candle | A small-bodied candle, which can be either bullish or bearish, showing indecision. | A small-bodied candle, which can be either bullish or bearish, showing indecision. |
| Third candle | A large red candle that confirms the reversal to a downtrend. | A large green candle that confirms the reversal to an uptrend. |
| Significance | Indicates that the current uptrend may be ending and a downtrend may begin. | Indicates that the current downtrend may be ending and an uptrend may begin. |
| Trading action | Traders might consider selling or shorting as a bearish signal. | Traders might consider buying or going long as a bullish signal. |
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Conclusion
While an Evening Star pattern could signal a potential reversal of a rising trend, it’s important to approach this indicator with caution. The pattern suggests that the price may soon start to decline, but it’s essential to confirm the signal with other indicators and market analysis. Careful consideration and confirmation help ensure that you’re not acting on false signals. Effective risk management, such as setting stop-loss orders and diversifying trades, is crucial to protect against potential losses. Source: investopedia.com
