As traders, we are all aware of the importance of using charts as a trading tool. Many of you have indicators and drawing tools that you use to analyze charts, but have you ever used a trading pattern instead?
In that regard, chart patterns are similar to candlestick formations, with some being more common than others. Even though chart patterns are less popular than candlesticks, the evening star is one of the simplest yet most effective chart patterns which can be easily found on forex charts.
So, suppose you’re eager to learn more about trading the evening star pattern in forex. In that case, you should know a few things about this forex trading pattern that can help you make better trades.
Defining The Evening Star Chart Pattern
Being a bearish reversal pattern, the evening star pattern is characterized by a high that creates a bullish candle followed by a lower close for the day and a lower opening the following day. The next candle should have a lower high and lower low to complete the pattern. The evening star pattern can appear at any time, but it is most common on more extended time frames, such as daily and weekly charts.
The evening star pattern is similar to an evening star candlestick, which is one of three shapes that make up the evening star pattern. The three shapes are the morning star, evening star, and shooting star candlesticks. These candlesticks have unique characteristics and meanings when they form in a chart pattern in forex trading or other markets.
The Evening Star Pattern’s Meaning
The evening star pattern predicts that prices will continue to fall after the formation of this chart pattern occurs because it indicates that demand for an asset has weakened considerably since it was previously traded higher in large volume.
After forming this bearish reversal pattern, trading lower indicates market participants are no longer bullish on an asset’s future price direction, which usually translates into negative price movement over time due to more supply than demand.
When To Trade The Evening Star Pattern?
The evening star pattern can be used as both an entry signal for a short trade and as an exit signal for an existing long position. The best time to enter a trade is when there is confirmation from other technical indicators such as moving averages and candlestick patterns.
The best exit point is when prices reverse from the high of the evening star pattern to form another candlestick pattern, such as a bearish engulfing candle or hammer candle, which indicates that the trend has reversed itself.
Tips For Trading
As with all candlestick patterns, several indicators can be used to confirm this pattern before entering an evening star forex trade. So, to confirm the formation of an evening star pattern, you need to wait for three candles: one green, one black (or white), and one green again (or black again).
The evening star pattern occurs in an uptrend and indicates that the upward momentum may be losing its strength. The first candle shows a price increase, which is followed by a small decrease, then another price increase. The third candle shows a price decrease and completes the formation of the evening star pattern.
After the formation of an evening star pattern, prices will likely fall below their opening value and continue falling until they reach support levels. If you have all three candles and they form an evening star formation, then you can place your trade based on your risk/reward ratio and time frame.
Is The Evening Star Pattern Reliable?
The evening star pattern is a straightforward pattern that signals the start of a new correction. However, other technical analysis techniques can assist in increasing the signal intensity generated by this pattern.
The pattern generates a stronger signal when it appears near resistance. The spot on the chart where buyers stop purchasing and sellers start selling is commonly referred to as the resistance point. Resistance levels can be determined before the evening star design is created. As a result, if the evening star formation emerges at the resistance level, it’s a stronger indication that a bear correction is likely to start.
On a chart, several sorts of resistance scenarios can occur. For instance, the horizontal resistance level is one of the easiest to spot. The evening star pattern can be extremely powerful when paired with horizontal resistance. A moving average is another simple form of resistance that can be found on a chart.
There you have it, the evening star pattern. Understanding how patterns work and how they are generated is critical to understanding market behavior. After all, learning this pattern, its characteristics, the relevance of time factors, key trading strategies, and some tips on how to trade it, can be a great addition to your advanced trading arsenal.