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The Forex Evening Star Candlestick Pattern
The Definition Of The Evening Star Candlestick Pattern
Among the many distinct forms of technical analysis techniques accessible to traders, candlestick analysis is one of the most popular. Candlestick patterns are divided into two categories: continuation patterns and reversal patterns. In this session, we'll look at the Evening star pattern, which is a common reversal candlestick formation.
Evening Star Candlestick Pattern
The Evening Star pattern is a three-candle candlestick configuration that is characterized as a reversal pattern. The structure is visible at the end of an uptrend, usually after a significant price increase. Traders would aim to position on the short side of the market if the pattern was confirmed since it has negative implications.
The Evening star pattern begins with a powerful bullish candle, which is followed by a middle candle that is reduced in size, and finally a strong bearish candle that closes beyond the halfway point of the first candle. Within this structure, the bodies of the candles are the most prominent, while the shadows or wicks are less important.
Looking at the price action, the first bullish candle implies tremendous upward momentum inside the market, followed by a period of neutrality, as shown by the smaller body of the middle candle. A Doji candle or a spinning top configuration is frequently used as the center candle. The center candle, on the other hand, does not have to be of any type.
Finally, a significant price move to the downside happens, indicating a noteworthy shift in sentiment that is likely to result in more price declines. Occasionally, the third and final candle in this pattern will open with a gap-down price move. When this happens, it means there is more supply in the market, which confirms the bearish stance.
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The Evening star candlestick pattern may be found on price charts rather regularly; however, the greatest examples are those that come near the top of an uptrend. Evening star formations of this sort would be regarded as the most trustworthy.
The Evening star pattern is the polar opposite of the Morning star pattern, as traders who are experienced with candlestick pattern research would understand. The first candle in the Morning star pattern is a lengthy bearish candle, which is followed by a smaller body center candle, and finally, a bullish candle that closes above the halfway point of the first candle in the formation. As a result, the Morning star pattern is considered bullish.
A simple way to understand an Evening star pattern is that it represents a war between bulls and bears, with the bears ultimately taking control of the market. A Morning star pattern, on the other hand, depicts a conflict between bulls and bears, with the bulls taking control of the market.
Bearish Evening Star Candle Pattern At Resistance
Let’s not go into some of the higher likelihood occurrences of the Evening star candle production now that we’ve set out the structural features. This structure is most commonly observed following a sustained price move higher within the framework of an uptrend, as we said before. Fading the trend, on the other hand, isn’t always a wise choice, especially when the price move has significant persistent momentum. Looking for the Evening star formation within a resistant area is one technique to tackle this.
A swing high, a psychological round number, a Fibonacci level, and other factors can all act as resistance. Any of them would complement the Evening star configuration well. Let’s look at an example of an evening star formation that occurs during an upswing and when a resistance level has been established.
The daily price behavior for the Euro futures contract is seen in the price chart above. Starting at the bottom left, you can see how the prices were heading higher, with the majority of the candles being green bullish candles. As a result, there was no doubting that the market was rising.
A large engulfing pattern appears later, halting the upward price movement and prompting prices to back down and retrace lower. Prices then consolidate and drift sideways from here. At this moment, a definite swing high resistance level may be seen. The red horizontal line towards the top of the price chart marks this resistance level.
An Evening star pattern will form later as prices climb upward approaching this resistance level. Within the yellow outlined region, the completed design may be seen. Prices began to trade lower almost immediately after the conclusion of the Evening star setup. The efficacy of combining traditional price movement with candlestick pattern analysis is demonstrated in this example.
Bearish Evening Star With RSI Indicator
Let’s take a look at another example of the Evening star candlestick reversal pattern in action. This time, we’ll use it in conjunction with the well-known Relative Strength Index indicator. The RSI indicator is a momentum indicator that may be used to determine the magnitude of a price change. In the event of a negative price move, it can tell us if a market is overstretched and has become oversold, while in the case of a bullish price move, it may tell us whether a market has become overbought.
The RSI indicator’s default look-back time is 14 periods, and an overbought condition occurs when the indicator’s reading exceeds 70. When the indicator reaches a value of less than 30, the market is considered oversold.
Take a look at the Gold price chart and the Evening star chart pattern with the RSI indicator in action.
We can observe that prices were increasing higher in a stairstep fashion starting from the far left of this pricing chart. To put it another way, the prices were producing a sequence of impulsive price swings upward, followed by corrective price moves lower. Furthermore, it is clear that the market’s overall tendency was upward.
The RSI indicator was climbing during the entire price sequence higher. This is a sign of a strong positive price trend. On the price chart, however, an Evening star reversal pattern emerged around the apex. Within the yellow outlined region, this may be seen. The RSI value was taken just as this reversal candlestick pattern was completed.
The RSI measurement had entered the overbought zone about the same time that the Evening star pattern was reaching completion, exceeding the upper barrier of 70. Following the completion of the Evening star formation, this would have presented an ideal chance to short the market. Despite the fact that prices stabilized after the pattern was completed, the price finally headed lower, as we had predicted.
Trading Strategy for the Evening Star
Now let’s look at how we may put together a whole Forex trading strategy that incorporates the Evening Star trading pattern. The approach we’ll go through is a straightforward yet successful way to trade the Evening Star signal. The method is applicable to all time periods and all liquid instruments. However, it should be emphasized that longer time spans, such as eight hours, daily, and weekly, work better. Additionally, using this analysis, markets that exhibit mean reversion characteristics tend to outperform.
Three technological factors are included in the plan. We’ll need to make sure there’s an Evening star pattern on the chart first. Second, we’ll keep an eye out for the Evening star formation to appear at or near a resistance level. Finally, the 50-day simple moving average will be employed in the technique.
The 50-day SMA, on the other hand, will be used in a totally different way than usual. Traders would often utilize the 50-day SMA as a trend filter and trade solely in the direction of the broader trend in most cases. In this situation, the 50-day SMA will be used as a mean reversion mechanism, and the price movement will be faded above the 50-day SMA.
We will only take short trades with the technique since the Evening star pattern is a bearish reversal pattern. Those are the rules.
- On the price chart, there must be an evening star pattern.
- At or around a resistance level, the Evening star pattern must appear.
- Above the 50-day SMA, the evening star pattern must finish.
- Once all of these requirements have been satisfied, enter a short position on the open of the next candle.
- Within the Evening star formation, a stop-loss would be put immediately above the highest high.
- The take profit level will be determined by the size of the full Evening star formation from its highest point to its lowest point. The objective will be set to be twice as long as the full Evening star formation.
The principles for this Evening Star trading method are, as you can see, pretty basic. But don’t be fooled by the system’s simplicity. It’s a solid trading method that performs admirably under the correct market situations.
One thing to keep in mind with the above technique is that some more cautious traders may want to scale out of their positions rather than hold for the entire two-to-one risk to return ratio. They can do this by quitting half of their position at the 1X mark and the other half at the 2X mark.
Example 1 of an Evening Star Trade Setup
Let’s put our previously described Evening star trading approach to the test. The price chart for the British Pound to US Dollar Forex pair, based on the daily timeframe, is shown below.
The price began trading sideways, forming a W shape, as can be seen in the far-left area of the chart. Within the price movement, we can observe that there are three distinct peaks. We may draw a major resistance level by drawing the best fit line between these three price peaks. As the price returns to this resistance level at some time in the future, we’ll be keeping a careful eye on it.
Prices proceeded to fall significantly after the W shape formation and ultimately paused as a bullish pin bar developed towards the bottom of the market action. A powerful price rise higher followed the bullish pin bar, and a bullish Marubozu candle broke through the 50 period SMA to the upside.
Prices then continue to stabilize before moving upward once again following a few checks of the 50 SMA support line. This time, the price reaches the resistance level and then pulls back a little. Following that, a push upward breaks over the resistance level, but the price is subsequently rejected to the downside. An Evening star candle formation has been completed here if you look attentively at the price activity.
All of the parameters for this trade setup have been satisfied at this stage. When the Evening star formation is done, we have a completed Evening star formation at or near a resistance level, and the price is trading above the 50 SMA. Following the completion of the Evening star pattern, we would put a sell entry order on the candle.
As can be seen, by the black dashed line labeled Stop, the stop loss would be set immediately above the peak high of the Evening star formation. Based on the scale of the Evening star formation, we’d forecast a price goal from here. Remember, we’ll be projecting downward from the pattern’s lowest low.
The maroon brackets are labeled 1X and 2X, respectively, and reflect a price change of one time the size of the formation and two times the size of the formation. Our aim would be established at the 2X level, depending on the strategic guidelines. The green horizontal line represents the point at which we would have profitably left this investment.
Example 2 of an Evening Star Setup
Let’s have a look at another use of the Evening star trading strategy. This time, we’ll be looking at the EURUSD currency pair’s daily chart. This graph may be seen below.
We can observe that the price started lower and then gradually increased. Take note of how many strong green candles reflect upward price closures against how many red candles imply downward price closes. There was no denying that the market’s general direction was optimistic. Following a brief period of consolidation inside the EURUSD pair, prices rose until we saw a bearish pin bar formation, commonly known as a shooting star pattern.
Another important candlestick pattern with negative implications is this one. Following the shooting star formation, we should consider the high of that candle to be a large area of supply, and hence set a resistance level there.
Now, after a few candles that followed the shooting star pattern and pushed prices down, the market is resuming its upward trend. The market creates another bearish reversal candlestick pattern as prices approach the barrier level. It’s an Evening star this time.
As a result, once we’ve identified the entire Evening star forex pattern, we’ll be able to plan a short trade in this market. But first, we need to make sure that the price is trading above the 50 SMA at the end of the Evening star formation. A quick scan of the chart verifies this, therefore we can put a sell entry order at the start of the next candle.
Just above the peak of the Evening star formation, you can see the entry-level noted, as well as the stop-loss location. Setting a goal at the level when the price hits two times the length of the full Evening star formation is part of our exit plan. The lowermost maroon bracket reflects our anticipated target level and departure point, which you may refer to. This Evening star reversal approach generated a good trade once again.
The Evening Star candlestick is an excellent reversal pattern to have in your trading toolbox. It’s a three-candle configuration that usually appears following a price rise higher for a long time. It has the same features as the Morning star candlestick but in the other direction. Furthermore, the Morning star candlestick is a bullish reversal pattern, but the Evening star candlestick is a bearish reversal pattern in technical analysis.
Trading the Evening Star setup may be done in a variety of ways. In this post, we’ve covered a handful of them, but that’s only the tip of the iceberg. In any event, the examples and illustrations supplied should provide you with a solid foundation on which to create your own trading strategies for this critical reversal pattern.