What is the morning star pattern?

As a broader definition, the morning star pattern is a popular tool among traders that helps spot potential reversals in the market. If we break it down a bit more, the morning star pattern refers to a visual pattern that consists of three candlesticks. Technical analysts interpret that as bullish signs.

When a morning star appears after a downward trend, it signals that prices may start rising. It also shows that the previous trend is moving into a different direction. After identifying a morning star, forex traders usually use other tools to ensure that the trend is really happening.

In other words, the morning star candlestick pattern is a bullish reversal pattern made up of three candlesticks that show a possible short-term shift from a downtrend to an upward trend. However, not all morning star patterns convert a downtrend to an uptrend. In fact, only a 10% perfect morning start pattern can do that.

About the three candlesticks in the morning star.

Strong selling pressure is indicated by the first candlestick, which is a long red bearish candlestick. It opens near the high and closes near the low and it must have a medium or large real body.

The second candlestick, a small body candlestick, can be either a bearish doji or a short bullish (red or green). It appears below the first one, creating, therefore, a gap that shows market uncertainty or a pause.

The third candlestick is a long, green bullish candlestick equal to 50% of the first one in length showing the potential start of a trend reversal and that buyers are stepping in. It starts close to the low and finishes near the high, closing above the middle of the first candlestic’s real body.

What does a morning star pattern show?

As already discussed, the morning star is a chart pattern consisting of three candlesticks. The second one usually forms the lowest point.

However, when the third candlestick closes, the entire pattern can be verified. As a result, real-time identification is not possible. Technical tools like support levels and the Relative Strength Index (RSI) can help identify possible setups, but you don’t need to perform any complex calculations to recognise it.

For example, if the RSI shows that an asset is oversold, a morning star may appear more frequently.

Green and red candlesticks are the ones most frequently used by traders. The second candlestick’s colour only shows that the current trend between buyers and sellers starts to change. It doesn’t impact the pattern.

Traders need to keep in mind that in the morning star pattern, the middle candle can be red or green resulting from buyers and sellers balancing out during that time.

Why is the morning star pattern important?

The red candlestick means that sellers are leading, and the market is still moving downwards. When the second candlestick opens lower, there is more evidence of selling pressure. The small candle in the middle, shows market uncertainty and a potential trend reversal. If that candle is a doji, there are more chances of a reversal. This is also known as morning doji star. Confirmation comes from the third bullish candlestick, which shows that buyers are taking control.

When a morning star candlestick pattern shows up at the bottom of a downtrend, it is an indication of a possible trend reversal. As a result, a lot of traders buy assets hoping to generate revenue. However, profits are only possible when the pattern is 100% perfect, forming clearly and correctly.

This pattern shows the change from sellers controlling the market to buyers taking over. It’s a visual indication that prices may soon start to rise offering a possible buying opportunity.

Below are the key advantages of a morning star pattern:

Trend reversal indication: Appears following a price drop showing that buyers are taking over.

High profit potential: Although not always the case, it frequently results in a significant increase.

Good risk-reward: Traders can enter early and set small stop-losses since it forms close to the bottom.

Clear trade setup: It provides clear, entry stop-loss and take-profit points.

Works with any timeframe: It can be applied to both monthly and 5-minute charts.

Works on all markets: It performs well in any financial instrument.

Simple to spot: You just look for a big red candle, followed by a small one and then a big green candle.

Happens frequently: It will be shown often on charts.

Can be automated: Trading software allows you to set alerts to find it.

Stronger with confirmation: If volume increases or more indicators support the move, it gains strength.

Defined profit targets: Traders can use previous price movements to determine their upside targets.

Best after a downturn: It performs best when the market has been falling or moving to another direction.

Faster than other patterns: This pattern forms faster than others such as the double bottom.

Can be combined with other bullish signals: Performs well when combined with other bullish candlesticks such as the piercing line or bullish engulfing line.

What makes a 100% perfect morning star?

1. The first candle should be a solid red bearish candlestick that indicates heavy selling activity.
2. The second candle, a small one, is either a doji or a short red or green candlestick that opens lower than the first candle, leaving a gap.
3. The third day is the bullish open with a gap up and it must close above the middle of the first candle.
4. This pattern is more reliable when it appears near a support level or when the market is oversold.

It’s best if this pattern is used when it is formed after three or more candles at least.

How to trade a morning star

The significance of morning star patterns increases when they are supported by technical indicators. Another important factor is the volume that contributes to the formation of the pattern.

Typically, a trader wants to see volume rising over the course of the pattern’s three sessions, with the third day seeing most volume. No matter what other indicators show, a high trading volume on the third day is frequently interpreted as a strong sign that the pattern is real.

When the morning star pattern forms in the third session, traders will enter a bullish position in an asset and ride the upward trend until there are signs of a new reversal.

Morning star, Doji morning star & evening star

The doji morning star is a smaller and slightly different version of the normal morning star pattern. The middle candle in this version appears as plus sign showing almost no price movement. Compared to a normal morning star with a thicker middle candle, this doji shows more uncertainty in the market.

A doji that appears after a red candle often results in a stronger market reaction. This happens because more traders notice the pattern, which can increase the trading volume. The third candle is usually a big green one that shows buyers are taking over.

The evening star, on the other hand, is the opposite of the morning star pattern. A long green candle opens the session followed by a short red or green candle and ends with a long red candle that closes at least halfway into the body of the first candle. As sellers start to take over from buyers, this pattern suggests that an upward trend may be coming to an end.

What are the limitations of it?

It can be risky to rely only on how a chart looks. When a morning star shows up close to a support level or is confirmed by additional indicators like high trading volume, it performs better. If otherwise, you could confuse any small candle in a downtrend for a real signal, which could lead to poor trading decisions.

Disclaimer: This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.