Trading Strategy Using Japanese Candlesticks: Evening Star and Morning Star with Volume Filter

Trading Strategy: Japanese Candlestick Patterns - Morning and Evening Star with Volume Filter

The Nature of Reversal Patterns

Japanese candlesticks are among the most informative tools in technical analysis, allowing traders to read the psycholog

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y of the market crowd. Among the multitude of graphic formations, the Morning Star and Evening Star patterns hold a special place. These patterns belong to the reversal category and signal a potential shift in the dominant trend. However, in modern market conditions characterized by high volatility and an abundance of fakeouts, using candlestick models in isolation often leads to losses. A professional approach requires additional confirmation, and the most effective filter here is trading volume. Vertical volume allows traders to distinguish the true sentiment shifts of smart money from short-term corrections and market noise.

Anatomy of the Morning Star

The Morning Star pattern forms at the bottom of a downtrend and heralds a shift of initiative to buyers. The classic model consists of three consecutive candles. The first is a full-bodied bearish candle confirming the strength of current selling pressure. The second is a small-bodied candle (a spinning top or doji) that symbolizes uncertainty and the equilibrium between bulls and bears. It can be any color, but the key factor is a gap down or minimal overlap with the previous body. The third candle is bullish, closing deep within the body of the first candle or higher. This is direct proof that buyers have begun to aggressively absorb supply and that bearish momentum is exhausted.

Structure of the Evening Star

The mirror image of the aforementioned model is the Evening Star, which occurs at the peak of an uptrend. It signals that the upward movement has reached a point of exhaustion. The first candle is a long bullish one, reflecting continued optimism. The second candle is a small body at the top, often separated by a gap up. This is a battle zone where buying meets powerful limit order resistance. The third candle is bearish, with a close below the midpoint of the first candle, confirming the victory of the sellers. For a trader, this is a signal to close long positions and look for entry points to go short, as the probability of a deep correction or a full trend reversal at this point is at its maximum.

Importance of Volume Filtering

The main problem with classic candlestick analysis is subjectivity. The volume filter adds the necessary objectivity to the strategy. During the formation of the stars, volume should be distributed in a specific way. On the first candle, volume is usually high, indicating the climax of the current move. On the second candle (the star), volume often decreases, demonstrating fading interest in continuing the trend. Critically important is the volume spike on the third, reversal candle. If the third candle of a Morning Star is accompanied by volume exceeding the previous two bars, it confirms institutional activity. A rise in volume on the reversal impulse means that large market participants are supporting the move, which significantly increases the mathematical expectation of the trade.

Entry and Stop-Loss Rules

Entry into a trade is executed strictly after the close of the third candle of the pattern, when the formation is considered fully complete. For a Morning Star, a buy order is placed just above the high of the third candle, or entry is executed at market price immediately after the close. The stop-loss is placed below the local low of the entire formation (below the shadow of the second candle) with a small buffer. For an Evening Star, the rules are symmetrical: enter a sell after the close of the bearish candle, with the stop-loss above the high of the star. An important condition is the absence of significant support or resistance levels directly in the path of the planned movement.