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How to Spot and Trade Reversals With the Evening Star and Abandoned Baby

evening star doji

This formation of a bullish candle, followed by a small-bodied candle, and then a bearish candle is the evening star candlestick pattern. In this hypothetical example, the appearance of this pattern in the Bitcoin market suggests that the uptrend may be reversing, and the downtrend could be on the horizon. Traders who recognize this pattern might decide to take profit or enter short positions, anticipating bearish market movement. But it’s a strong and reliable signal for the trend reversal in Forex and other financial markets. The opposite of the evening star is the morning star pattern, in which case we have a bearish reversal trend. It’s advisable to combine this signal with oscillator indicators and trendlines to get more accurate price action predictions.

What does a doji star mean?

The Doji candlestick, also called a Doji star, shows indecision between buyers and sellers in the crypto market. This type of candlestick is confirmed on a technical analysis chart when the opening and closing prices are almost identical.

The Relative Strength Index is commonly used to predict areas where an Evening Star pattern is more reliable in signaling a bearish reversal. There are many candlestick patterns, and I could go on explaining these patterns, but that would defeat the ultimate goal. You might also look for evening star or abandoned baby patterns that occur on longer timeframes and then dig into shorter timeframes to pinpoint entry and exit points. According to Bulkowski’s Pattern Site, the abandoned baby is a very rare chart pattern.

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Finally, the third one is a large bearish candlestick that affirms the momentum shift from bullish to bearish. So my advice to you would be to know the patterns that we have discussed here. They are some of the most frequent and profitable patterns to trade on the Indian markets. As you progress, start developing trades based on the thought process behind the bulls’ actions and the bears.

This guide explains what the Evening Star pattern is and how to recognize and interpret it with the help of an example chart and trade. This guide will discuss all there is to know about the Doji Evening Star pattern, including how to identify and trade it. From beginners to experts, all traders need to know a wide range of technical terms. Trade up today – join thousands of traders who choose a mobile-first broker. Buyers push price all the way up higher and closing near the highs. Along those lines, it is telling us that the market’s rally could not be sustained.

There should be a gap up from the first candle to the star in an ideal Evening Star pattern. It means that the open price increased rapidly from the preceding close price with very few or even no transactions happening in the meanwhile. The second candlestick is usually a small, bearish candlestick that affirms waning short-selling pressure.

Following the sharp rise in prices reflected by the bull gap, momentum began to weaken the day after the star appeared. Identifying the evening star candlestick pattern on the forex/stock/crypto chart is more than just identifying the three main candles. What is needed is to understand past price behavior and where the pattern appears in existing trends. The two candlesticks should have alternating colors with the first confirming the current trend and the second indicating a weakness in the trend.

What is an evening star?

Specifically, it represents the open, high, low, and close price for the stock over a given time period. Similarly, whenever the readings are below 30, the underlying evening star doji asset is considered oversold. The relative Strength Index is another common indicator commonly used to ascertain areas where the market is overbought or oversold.

It is a large bullish candlestick with small wicks on both ends that closes close to the open of the first long bearish candlestick. Afterward, the price tanked with the highs of the Doji candle, acting as a strong resistance level. The abandoned baby is a bearish doji pattern that predicts a reversal. After an uptrend, the candle appears with a narrow trading range and little price movement, suggesting that there’s a lot of indecision in the market. The idea behind the pattern is that the decrease in momentum following a bullish uptrend could lead a bearish reversal.

Doji Evening Star with a Volume Indicator

The Relative Strength Index (RSI) is a popular indicator as it helps traders realize whether the current trend could reverse. Technically, the RSI tells you several things; overbought/oversold levels and divergences. Having these confluences from using the RSI indicator allows you to enter a trade more confidently. Originally, Thomas Bulkowski presented the idea of the Doji Evening Star candle pattern in the Encyclopedia of the Candlestick Charts.

The pattern is a long-bodied candle with a common occurrence in the bull market. When the market opens higher as compared to the previous day, it is closer than another bull market. The sentiment will change during the middle of the second day when the bulls fail to make further headway. If there is a price gap the second candle come out as a little bearish candle and implies price consolidation and indecision. The first candle is a long bullish candle so the Doji candle means that the trend created by the first long bullish candlestick that loses its momentum.

Tesla shares’ ‘evening star’ chart pattern portends a reversal in progress – MarketWatch

Tesla shares’ ‘evening star’ chart pattern portends a reversal in progress.

Posted: Thu, 06 Feb 2020 08:00:00 GMT [source]

These candles should be a dark and must close well with the previous candle. Combining the observation of reversal patterns with support and resistance lines is interesting. In order to identify a Doji candlestick, look for a cross or star pattern.

The reliability of these patterns increase when the first candlestick is has a large real body while the second candlestick has a short real body. The Evening Star pattern is a type of reversal pattern of asset price charts. It usually appears at the top of an uptrend and is a bearish signal. Traders do not commonly see an Evening Star pattern, but it is a reliable indicator for technical analysis. Candle theory says that the evening doji star pattern should act as a bearish reversal of the upward price trend, and testing reveals that it does 71% of the time. However, with a frequency rank of 81st, you might not find this candle.

The candlestick on Day 2 is quite small and can be bullish, bearish, or neutral (i.e. Doji). The third candle is a bullish one, which confirms the reversal and covers most of the first candle loss. Ideally, there is a gap down from the first candle to the morning star, a gap up from the morning star to the confirmation candle. If you want a few bones from my Encyclopedia of candlestick charts book, here are three to chew on. Unlock our free video lessons and you will learn the exact chart patterns you need to know to find opportunities in the markets. Learn the exact chart patterns you need to know to find opportunities in the markets.

Also, Day 3 powerfully broke below the upward trendline that had served as support for XOM for the previous week. Both the trendline break and the classic Evening Star pattern gave traders a potential signal to sell short Exxon-Mobil stock. So, let’s see some trading strategies to use when identifying the Doji evening star pattern.

It is a candle with a shorter body and does not touch the body of the previous candle. The gap between the two real bodies of the candlestick makes it a Doji star. The Evening Star pattern is viewed as a bearish reversal pattern in technical analysis.

  • The morning star pattern forms when a small-bodied candle gaps below the previous bearish candle, followed by a bullish candle that closes above the midpoint of the first candle.
  • Whereas the abandoned baby’s shadows must be clear of the preceding and proceeding shadows, the evening star only requires that the body is higher than the surrounding bodies.
  • So my advice to you would be to know the patterns that we have discussed here.
  • Learning chart patterns might be the fastest way to making consistent money in the stock market.

They are considered an inside bar and come out as a bearish candle if there is a price gap. The third candle has closed below the first candle opening price. The strong reversal pattern is formed at the end of a continued rally.

Waiting for a confirmation on the 4th day may not be necessary while trading based on a morning star pattern. An evening star candlestick pattern should have a gap separating the first and second real bodies and then another gap separating the second and third real bodies. The bullish version of the evening star pattern is the morning star candlestick.

evening star doji

All the other Star patterns are reversal patterns that can help traders make buy or sell decisions. As discussed above, an Evening Star pattern consists of three candles, one for each day. On the first day, with a long bullish candle, the asset price moves upward with strong momentum. After a sudden increase in price reflected by a gap up, the momentum starts to weaken on the second day when the star appears. In the GBP/USD chart above, you can see how the price dropped drastically after the appearance of the Doji Evening Star.

The Hammer pattern is called a takuri in Japanese, which means testing the water for its depth. Also take a look at our guides on stock, CFD, and commodity brokers to find out which online trading platforms are available in . We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools.

This type of candlestick is unique because it does not have a traditional body; instead, the opening and closing values are equal, with a different high and low. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74%-89% of retail investor accounts lose money when trading CFDs. You should consider whether you can afford to take the high risk of losing your money.

Harness past market data to forecast price direction and anticipate market moves. No matter your experience level, download our free trading guides and develop your skills.

The bullish equivalent of the Evening Star is the Morning Star pattern. The best average move is a rise of 8.77% in a bear market, ranking 4th. My guess is that the 63 samples composing the rise is too few to justify having faith in it. Get ready to receive three amazing chart pattern videos that are over 30 minutes long straight into your inbox. Get €25,000 of virtual funds and prove your skills in real market conditions. Harness the market intelligence you need to build your trading strategies.

As said earlier, the occurrence of a morning star pattern is not as frequent as those of a single-candle formation. They are harder to spot, aside from you practically needing to fulfil all four conditions before you can verify its presence. Think about car driving; once you learn how to drive a car, it does not matter which car you drive. Driving a Honda is pretty much the same as driving a Hyundai or Ford. Driving comes naturally irrespective of which car you are driving. Likewise, once you train your mind to read the thought process behind a candlestick, it does not matter which pattern you see.

It takes place at the top of the market uptrend, signaling a potential reversal. In this article, we dive deeper into this important tech analysis pattern. Reversal patterns mark the turning point of an existing trend and are good indicators for taking profit or reversing your position. Generally, trend reversal patterns indicate that a support level in a downtrend or a resistance level in an uptrend will hold and that the preexisting trend will start to reverse. These patterns allow you to enter early in the establishment of the new trend and usually result in very profitable trades.

This candle confirms the Evening Star pattern (ideally with a gap down) and gives a selling signal. All ranks are out of 103 candlestick patterns with the top performer ranking 1. “Best” means the highest rated of the four combinations of bull/bear market, up/down breakouts. In the evening star pattern, the middle candle is not a Doji candle, meaning the opening and closing are not exactly the same. In contrast, in the Doji Evening Star pattern, the second candle is a Doji candle with the same or almost the same opening and closing prices. When analyzing the Doji evening star, you’ll focus on the overbought condition only as the pattern appears at the end of an uptrend.

What happens after evening star?

It is followed by a smaller green candle that opens higher than the large red candle and closes lower. It is a sign that the bulls are taking control of the stock, and the selling pressure is easing. Traders tend to take a long position when this pattern appears.

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