Morning Star and Evening Star candlestick patterns on daily cryptocurrency charts

What are the Morning Star and Evening Star patterns?

The Morning Star and Evening Star candlestick patterns are powerful reversal formations frequently encountered in financial markets, including crypto. These three-candle patterns signal a potential change in trend direction. On daily charts, they carry significant weight as they provide more reliable signals compared to those on lower timeframes.

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Identifying the Morning Star

The Morning Star pattern signals a bullish reversal following a downtrend. It consists of three candles:

First candle: A long bearish candle confirming seller dominance. Second candle: A small candle (doji, spinning top, or hammer) with a small body and wicks. It can be either bullish or bearish. Crucially, its body is significantly smaller than the first candle and often gaps down. This candle represents market indecision and waning selling pressure. Third candle: A long bullish candle that closes well above the midpoint of the first candle, confirming that buyers have taken the initiative. Ideally, it gaps up relative to the second candle.

Identifying the Evening Star

The Evening Star pattern is the mirror image of the Morning Star and signals a bearish reversal after an uptrend. It also consists of three candles:

First candle: A long bullish candle indicating buyer strength. Second candle: A small candle (doji, spinning top, or shooting star) that can be bullish or bearish. It often gaps up, demonstrating fading bullish momentum and market indecision. Third candle: A long bearish candle that closes well below the midpoint of the first candle. This confirms a shift in sentiment and increased selling pressure. Ideally, it gaps down relative to the second candle.

Market psychology behind the patterns

The psychology behind these patterns is straightforward. In the case of a Morning Star, a prolonged decline (first candle) gives way to a phase of indecision (second candle), where neither buyers nor sellers can gain the upper hand. Then, sensing weakness, buyers step in aggressively, leading to a sharp rally (third candle).

Similarly, for the Evening Star, a strong rally (first candle) is followed by a moment of uncertainty (second candle), where bulls have exhausted their steam and bears start to show activity. Eventually, the bears take control, leading to a significant drop (third candle).

Application on crypto daily charts

On crypto daily charts, these models are particularly reliable because each candle represents an entire trading day, which filters out market noise and random volatility. For traders, this means signals from Morning and Evening stars on daily timeframes carry more weight and can be used to make more informed trading decisions.

For example, spotting a Morning Star after a prolonged dip in Bitcoin or Ethereum on a daily chart can be a strong signal to enter a long position, especially if it occurs near key support levels or aligns with other indicators such as RSI, MACD, or trading volume. High volume on the third candle significantly increases the pattern’s validity.

A trading strategy for the Morning Star might involve entering a position after the close of the third bullish candle, with a stop-loss set below the low of the second candle or the low of the entire pattern. Profit targets can be set at the nearest resistance levels or by using Fibonacci extensions.