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Morning Star Pattern

The morning star pattern is an exceptional bullish reversal pattern and is a three candlestick pattern. The morning star consists of a long, red candlestick, a second smaller, red or green candlestick which gaps lower and is commonly a short body, and a third wide-spread green candlestick that closes deeply into the first red candlesticks body. The small body candlestick that gaps lower is what constitutes a “star” and symbolizes indecision. The initial wide-spread, red candlestick designates intense selling pressure, but a gapped-down, small, real body signifies indecision. Finally, the tall, green candlestick communicates that demand exceeds supply at the corresponding price area, and the downtrend may change.

When the morning star pattern forms, we observe a complete shift in supply and demand at the price level over three sessions. The above-average, red candlestick reflects strong selling intensity. The second candlestick gaps down, a reflection of strong selling intensity; however, a short-body forms. This is fine, until the third candlestick gaps up, closes near the intrasession high, and is of an above average spread, reflecting demand > supply at the corresponding price area.

Figure 1.1 Morning Star Pattern

Chart, waterfall chart

Description automatically generated In Figure 1.1, note that the color of the second candle, or “star,” is irrelevant. Red or green are both acceptable. Also, whether or not the upper shadow of the star penetrates the body of the prior red candlestick is marginal. The upper shadow of the star can also penetrate the body of the next green candle without much consequence, as long as the real bodies remain separated. When this pattern materializes, we are, quite literally, observing the following sequence. Strong selling (supply), diminished selling, increased buying (demand), strong buying.

Figure 1.2 Morning Star with Bullish Implications

Chart

Description automatically generated (NASDAQ: PYPL)

In Figure 1.2, the price movement of $PYPL can be observed as experiencing a transient downtrend. At the bottom of this downtrend, a morning star with substantial bullish implications forms since the wide-spread, green candlestick is shaven. In due course, prices increase, but so does selling intensity, stalling the price increase for two sessions. In the next session, a bullish engulfing candle is produced (unmarked), and price movement continues the uptrend a few sessions after. We cannot expect prices to decrease any further unless bears aggressively sell the market near the “star” of the pattern. Selling intensity must exceed buying intensity at the price area if the downtrend is to continue.

Figure 1.3 Example of Morning Star Reversal

Chart

Description automatically generated (NYSEARCA: IWM)

Figure 1.3 displays two individual morning star formations, although only one of them precedes a strong reversal. The first morning star satisfied the criteria of the formation; however, there is weakness after the pattern, and prices inevitably fall further before another morning star forms. The first morning star preceded a bullish retracement of the downtrend. The second morning star is not joined by any distinctive bullish formations. There are only adequately-sized, green candles instituted afterward that reflect exponentially increasing demand.

Once you learn how to implement supplementary indicators, allowing you to add supplementary rules to your strategy, you will increase your edge and be able to distinguish trading opportunities. This should be done within the scope of your trading strategy. Cherry-picking indicators that will confirm a signal, or your predisposition is not conducive to long-term, consistent profitability. Doing this is the equivalent of guessing. If the criteria for your trading strategy are met, open a position. If not, do not open a position. You can always refine your trading strategy if efficacy is diminished. However, do not deviate from your trading strategy without first refining it.

Evening Star

The evening star is a considerable top reversal formation that functions as a bearish reversal indicator. The evening star consists of a wide-spread, green candlestick, a second smaller, red or green candlestick which gaps higher and is commonly a short-body, and a third wide-spread, red candlestick that closes deeply into the first green candlestick real body. The small body candlestick that gaps higher constitutes a star and is considered to symbolize indecision. Essentially, the initial long, green candlestick indicates strong demand. The subsequent gap-up has similar indications. However, the short-body candlestick reflects diminished buying intensity. In real-time, the short-body candlestick is acceptable, but the elongated gapped-down, red candlestick communicates a shift in power; bullish to bearish. The evening star is a reflection of the following sequence over three sessions. Strong buying (demand), diminished buying, increased selling (supply), strong selling.

Figure 1.4 Evening Star

Chart, waterfall chart

Description automatically generated In Figure 1.4, the color of the star is irrelevant. Both green and red are acceptable. The evening star pattern is a three-line formation that signals a potential bearish reversal. The third candlestick should close approximately 50% or greater into the initial green candlestick.

The evening star does not form often; however, it is considered a reliable bearish reversal signal. Of course, an evening star may precede a bearish retracement, which is not a bearish reversal, or may even precede an immediate continuation of the uptrend.  

Figure 1.5 Example with Evening Star

Chart

Description automatically generated (NYSE: PXD) 

In Figure 1.5, prices are uptrending expeditiously until buying pressure exhausts, leading to an evening star pattern. Prices descend after the pattern and a downtrend is sustained for several months. We can see prices never close above the “star” of the evening star formation, and a bearish reversal is instituted. Did the evening star cause the bearish reversal? Of course not! However, the evening star allowed us to identify a strong shift in sentiment/supply and demand at the price level.

Figure 1.6 Evening Star Pattern

Chart

Description automatically generated (NYSE: TWTR)

In Figure 1.6, prices are sustainably uptrending until reaching a peak. As prices peak, an evening star pattern forms. Prices retrace strongly after the pattern until forming a trough. Prices continue uptrending thereafter. Despite the failure of sellers to sustain a complete bearish reversal, there was certainly a trading opportunity present here. However, there was more profit to be realized getting in the uptrend as the bearish retracement terminated than there was shorting the retracement itself.

We must understand that candlesticks serve as a conduit for the forces of supply and demand. Understanding how formations reflect supply and demand, including a shift in power between the two, is critical. If we distinguish a formation, we can reasonably consider demand, or supply, at the particular price area to be strong.

Objectifying and Backtesting the Morning Star and Evening Star

Typing out the patterns conditions will likely cause more confusion than insight.

Instead, I’ll post the source code and create a reference table.

Figure 1.7 Morning Star Criteria

Morning Star Source Code

Close[2] and Open[2] = Close/Open price of session two days prior. The first candlestick of the morning star pattern.

Close[1] and Open[2] = Close/Open price of sessions immediately prior. The “star” candlestick of the morning star pattern.

Close and Open = Close/Open price of current session. The green candlestick which completes the morning star pattern.

atr = Average True Range. We’re using the Average True Range indicator to filter out weak patterns with narrow-spread candlesticks. The difference between the open and close of the first candlestick for the morning star pattern must be greater than, or equal to, the ATR measurement / 2. This condition must also be true for the third candlestick of the morning star pattern.

The close >= ((open[2] + close[2])/2) specifies that the close price of the third candlestick must be greater than the difference between the open and close price (mid-point) of the first candle for the pattern.

Figure 1.8 Evening Star Criteria

Evening Star Source Code

Close[2] and Open[2] = Close/Open price of session two days prior. The first candlestick of the evening star pattern.

Close[1] and Open[2] = Close/Open price of sessions immediately prior. The “star” candlestick of the evening star pattern.

Close and Open = Close/Open price of current session. The red candlestick which completes the evening star pattern.

atr = Average True Range. We’re using the Average True Range indicator to filter out weak patterns with narrow-spread candlesticks. The difference between the close and open of the first candlestick for the evening star pattern must be greater than, or equal to, the ATR measurement / 2. This condition must also be true for the third candlestick of the evening star pattern.

The close <= ((open[2] + close[2])/2) specifies that the close price of the third candlestick must be less than the difference between the open and close price (mid-point) of the first candle for the pattern.

Figure 1.9 Objectified Evening Star / Morning Star

Morning Star

Figure 1.9 shows our objectified morning star and evening star forming on a price chart. The ATR indicator is not pictured.

Backtesting the Morning Star

Entry Criteria

  1. VIX < 30 (VIX closes below 30)
  2. A Morning Star forms

Exit Criteria

  1. A 9% profit is achieved

Or

2. A 3% loss is achieved. However, if prices move 3% against our position, we’ll look to exit when close > high[1] (the closing price of a session is greater than the high price of the session before it).

Important Notes

There’s few parameters and the strategy is extremely simple. Why? The strategy has to be simple. A “quality” morning/evening star rarely forms. If we require more conditions than necessary we’ll likely never enter a position during the backtest.

The evening star pattern will not be backtested; however, I’ll post the source code, which includes the evening star, at the end of the article. You can backtest the formation if you would like.

Warning

Both formations are rare; it’s unlikely we’ll achieve a statistically significant sample size without backtesting a basket of securities. You can run the source code to execute backtests on additional securities/crypto/currency pairs if you’d like.

Figure 1.10

Morning Star Backtest
Figure 1.10 shows backtest results accounting for all historical price data. We can’t statistically infer a positive expected outcome with 13 trades over 40 years. Consider the data meaningless until achieving a greater number of observations.

The Truth about Morning Stars and Evening Stars

Both formations rarely form; you’ll typically have to scrutinize historical price data just to find a few. However, the patterns server as strong warning indications when they do appear.

Due to scarcity, you won’t have to be apprehensive of one forming against your position. Just know how to distinguish the patterns when they do form.

Source Code

Just copy and paste this into PineEditor on Tradingview.

// This source code is subject to the terms of the Mozilla Public License 2.0 at https://mozilla.org/MPL/2.0/
// © KioseffTrading

//@version=5
strategy(“My Script”, overlay = true, default_qty_type = strategy.cash, default_qty_value = 100000, process_orders_on_close = true)

atr = ta.atr(14)

mstar = close[2] < open[2] and (open[2] – close[2]) >= ((atr)/2)
and (close[1] >= open[1] or close[1] <= open[1]) and close [1] < close[2] and open[1] < close[2] and close[1] < open[2] and open[1] < open[2] and close > open and (close – open) >= ((atr)/2) and close > close[1] and open > close[1] and close > open[1] and open > open[1] and close >= ((open[2] + close[2])/2)

plotchar(mstar, location = location.belowbar, size = size.normal, text = “MSTAR”)

estar = close[2] > open[2] and (close[2] – open[2]) >= ((atr)/2)
and (close[1] >= open[1] or close[1] <= open[1]) and close[1] > close[2] and open[1] > close[2] and close[1] > open[2] and open[1] > open[2]
and close < open and (open – close) >= ((atr)/2) and close < close[1] and open < close[1] and close < open[1] and open < open[1] and close <= ((open[2] + close[2])/2)

plotchar(estar, location = location.abovebar, size = size.normal, color = color.red, text = “ESTAR”)

VIX = request.security(“VIX”, “D”, close)

if mstar and VIX < 30 strategy.entry(“long”, strategy.long) if close >= strategy.position_avg_price * 1.09
strategy.close(“long”)

var saveclose = false
if close <= strategy.position_avg_price * .97 saveclose := true if saveclose == true and strategy.position_size > 0
strategy.close(“long”, when = close > high[1])
if strategy.position_size < 1
saveclose := false

if estar and VIX < 30
strategy.entry(“short”, strategy.short)
if close <= strategy.position_avg_price * .97
strategy.close(“short”)

var saveclose1 = false
if close >= strategy.position_avg_price * 1.01
saveclose1 := true
if saveclose1 == true and strategy.position_size < 0 strategy.close(“short”, when = close < low[1]) if strategy.position_size > -1
saveclose1 := false

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Legal Disclaimer: The information contained in the article is not intended as, and shall not be understood or construed as, financial advice. The author is  not an attorney, accountant, or financial advisor, nor are they holding themselves out to be, and the information contained in this article is not a substitute for a professional who is aware of the circumstances and facts of your personal financial situation. 

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