Evening Star Pattern

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21 Aug, 2024

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The evening star pattern is a bearish reversal pattern consisting of three sequential candlesticks, indicating a probable trend reversal to bearish from bullish. Traders use the evening star pattern as a signal for shorting or selling an asset because it represents a weakening of bullish momentum followed by a bearish trend.

It mostly happens during the uptrend of the markets. The pattern consists of a big, long green or white candlestick, a smaller green or red candlestick, and a long black or red candlestick. The evening star pattern becomes significant for traders if a small candlestick is followed by a bearish candlestick that is closed beneath the middle point of a bullish candlestick.

What Is Evening Star Candlestick Pattern?

The evening star pattern is a three-candlestick pattern indicating a possible trend reversal from bullish to bearish.
It's a bearish reversal pattern that traders use as a signal to sell or short an asset because it shows a weakening of the bullish momentum followed by the emergence of a bearish trend.
To trade the evening star pattern, you have to identify the pattern, confirm the pattern's validity, enter the trade, manage the trade while it's open, and exit the trade at an appropriate time.
It represents a bullish trend reversal appearing at the end of the downtrend, whereas Evening Star Pattern represents a bearish trend reversal appearing at the end of the uptrend.

Evening Star Pattern Candlestick Explained

Evening star pattern candlestick acts as a standard tool to identify the reversal of upward security price momentum into a bearish one. Besides being the most reliable bearish indicator, it rarely appears in the evening star pattern charting. Moreover, these are considered the most complex trend reversal formations based on three consecutive candles occurring rarely. Additionally, it always gets found at the top of the market's uptrend.

As a general note, the evening star consists of a huge bullish candle stick, a small-shaped candle, and a bearish candle. Its shape and nature oppose the morning star pattern. Furthermore, for a pattern to get identified as the evening star, the following conditions are to be met:

It should occur at the end of the uptrend.
The first of the three candles must be long plus bullish.
The second of the three candles must be near the top, signaling indecision.
The third and fourth candles must be signaling the start of the trend reversal as the price action breaches the control of the buyers.

Correspondingly, the appearance of the candlestick should follow the below pattern:

On day 1, a huge bullish candle would appear
On day 2, a small bearish or bullish candle appears
On day 3, large bearish candlestick forms
There must be a gap up between the day one bullish candle and the day two bullish or bearish candle
There must be a gap down between the day two bullish or bearish candle and the day three bearish candle

Moreover, one must note that the evening star pattern target usually appears at the fag end of the upward market trend. The evening star is usually considered a bearish trend reversal pattern, indicating its movement towards a downtrend, signaling traders to take a short position on their security. It also indicates that bears have started taking control of the market, pushing the security prices to a much lower level. If used with appropriate risk management tools and various technical analysis tools, it can give good profits to the traders.

In the TradingView chart given below, the evening star pattern of BankNifty is clearly visible. First, there is a green bullish candle followed by a doji, which denotes indecision, and then there is a red bearish candle. Traders should be aware that this kind of pattern signifies a downtrend in the near future, and it is an ideal situation if it appears at the end of an uptrend. It is easy to understand that now is the point where the market will head toward a down move, and traders should either plan for an exit or take a short position. This will reduce the risk of loss and also help traders take advantage of the fall and make substantial profits.

However, even though it is called a pattern that signifies trend reversal, it should be used in combination with other indicators that will give a confirmed outlook. Evening stars is not to be used as a standalone indicator to make trade decisions.

Source

Examples

Let us see a few examples to understand the topic:

Example # 1

Let us look at the chart below:

One can observe that:

A huge bullish candle appears on day 1.
A small bearish or bullish candle appeared on day 2.
A large bearish candlestick formed on day 3.
There is also a gap upward between the day one bullish candle and the day two bullish or bearish candle.
There is also a gap downward between the day two bullish or bearish candle and the day three bearish candle.

Hence, we can confirm that the pattern is of the evening star, which can give good profits to the trader using risk management and other technical analysis tools.

Example # 2

Let us take this example of the Amazon.com Inc.

It is evident from the chart that:

On day 1, a massive bullish candle emerges.
On day 2, a little bearish or bullish candlestick has formed.
On day 3, a big bearish candlestick appeared.
Additionally, there's a space between the bullish candle of day one and the bearish or bullish candle of day two.
There is a gap downward between the day three bearish candle and the subsequent day two bullish or bearish candlestick.

So, one can say with certainty that the pattern corresponds to an evening star, which may give the trader significant returns when using risk control and other technical and analytical techniques.

How To Trade?

Evening star has been a technique of bearish reversal pattern appearing at the fag end of the market uptrend. For trading sign the pattern, one has to identify it and then apply the below steps for making the trading decision:

The first step is to identify the evening star pattern. It can be done by knowing that three candles make it up. The first candle is red, having a large length; the second candle appears quite small, being bearish or bullish; and the third candle is long bearish. Moreover, the second candle must have an unusually small body with a long upper shadow.
Then comes the step of confirming the pattern using various technical indicators, for instance, trend lines, oscillators, and moving averages.
After the pattern is confirmed, trade could be started by taking a short asset position. Moreover, After that, one can immediately enter the market or take time for a pullback to get a better entry price. Furthermore, one must also put in place the stop loss order to protect one's position in case market trade goes into loss.
After evening star pattern entry into the trade, one has to monitor the positions closely while adjusting stop loss for taking profit orders. Apart from this, one can also deploy trailing stops, which will lock in profits when the price changes in one's favor.
Finally, one should exit the trade as soon as the price approaches the level of take profit or if the bullish trend reversal invalidates the pattern of the evening star.

In closing, one must take care that only patterns cannot be enough for profitable trade, but one should use due diligence and risk management methods to safeguard one's capital.

Morning Star vs Evening Star Pattern

Both patterns have three candles that indicate trend reversal but of different natures. Hence, let us take the help of the table below to understand the differences:

Morning Star	Evening Star Pattern
The second candle has a long lower shadow.	It represents a bearish trend reversal appearing at the end of the uptrend.
In the morning star, the first candle is long & bearish.	In the evening star, the first candle is long & bullish.
The second candle has a long lower shadow.	Here, the second candle has a long lower shadow.
The third candle is bullish & long.	The third candle is bearish & long.
It suggests that bears have started losing grip and bulls have started taking control of the market.	It suggests that bulls have started losing grip and bears have started taking control of the market.

Frequently Asked Questions (FAQs)

1. What is the success rate of the evening star pattern?

One cannot say with a hundred percent surety that it has the most accurate prediction, but if used with other tools, traders can use it to obtain huge profits. Nevertheless, risk management and technical tools must be used to restrict any losses due to the negative movement of the market.
Nevertheless, one must keep in mind that without proper risk management and technical tools, the losses might increase, and profit may decrease.

2. What are the benefits of evening star pattern?

It provides the following benefits to the traders:
· Identification of potential trend reversal
· Provides vivid entry signals
· Offers exact stop-loss levels
· Anchoring the risk management techniques

3. What does the evening start pattern indicate?

An evening star pattern indicates the most probable reversal trend from an uptrend to a downtrend, loosening of control of bulls on the market and signaling traders to a short position of the asset.