Candlesticks Charts & Patterns
Evening Star Candlestick Pattern
After learning the Morning star candlestick pattern previously, let us now understand the Evening star candlestick pattern.
What is an Evening Star Candlestick Pattern?
Evening Star is a candlestick pattern that appears at the end of the uptrend and signals that a downtrend is going to take place. It consists of three candlesticks: a large bullish candlestick, a small-bodied candle, and a bearish candlestick.
The first candle in the pattern, is in continuation of the prior trend, the market opens high, makes a new high and closes near the high point of the day. The long bullish candle formed on the 1st day shows buying acceleration. On the 2nd candle of the pattern, the market opens with a gap up reconfirming the bull’s stance in the market. However after the encouraging open the market/stock does not move, and sees a selling pressure. It closes by forming a doji/spinning top. On the 3rd candle of the pattern, the market opens gap down and progresses into a red candle. The long red candle indicates that the bears are taking control.
So the 1st candle is a bullish candle, 2nd candle is a doji or a spinning top. The colour of the second candle is not important. The real body of candle 1 and candle 2, should not overlap each other. The third candle opens gap down and is a long bearish candle. Again the real body of the second and third candle should not overlap.
If we remove the second candle from between, the relationship between 1st and 3rd candle is that of a bearish engulfing pattern or a dark cloud cover pattern. Volumes should be high during these candle formations.
What is the psychology behind the pattern?
The current market sentiment is bullish, and the prices keep on making higher highs. When the first candle of the evening star forms, this bullish sentiment holds. When the second candle is formed, then the market sees another bullish day as the candle gaps up. As the market has gone up quite a lot, traders assume that profit booking might come in, as it has continued up for some time. Due to this, the selling pressure starts and it makes it harder for the bulls to continue pushing the prices up. The market closes around where it opened, and thus creates a Doji or a spinning top candlestick pattern. The third-day candle confirms that the bears have taken control over the prices by the formation of the bearish candle. The market gaps down and more people are expecting the trend to get reverse.
The confirmation of the reversal signal is given by the third bearish candle itself. Once it is clear during the session that the third candle will close lower and relationship between 1st and 3rd candle would be that of bearish engulfing or dark cloud cover, a short trade can be initiated. Stop-loss can be placed at the high of the second candlestick.
Now that we are at the end of the module, we have completed our learning about candlestick charts and patterns. It is now time to practice them well and start identifying them on the price charts. But remember, the learning does not end here. There are so many things to learn about technical analysis. Analyzing candlestick chart patterns is a part of the bigger goal, which is to become a wonderful trader. So, there are a lot more things to learn about technical analysis, which we have covered in different modules of ELM School. Be sure to read them all to gather the necessary knowledge and skill about technical analysis to become a successful trader.