Evening Star Pattern: A detailed guide
Trading Strategies
In the fast-moving world of stock trading, where rapid market shifts can significantly influence investments, recognizing candlestick patterns is essential. Among these, the Evening Star pattern stands out as a potent signal of possible market reversals. This article explores the Evening Star Pattern in depth to provide a clear understanding of its importance and nuances.
What is the Evening Star Pattern?
The Evening Star Pattern is a candlestick formation that technical analysts use to identify potential trend reversals. It consists of three candles and typically appears at the peak of an uptrend, signaling a potential end to the upward movement. The pattern generally includes a large bullish candle, followed by a smaller-bodied candle, and concludes with a bearish candle. In contrast, the Morning Star pattern indicates a bullish reversal at the conclusion of a downtrend.
Evening Star Examples
The formation of the Evening Star pattern can differ based on the asset and timeframe. Here are some examples across various markets:
Crypto Market: ETHUSD, M30 Chart
On the Ethereum (ETHUSD) M30 chart, the Evening Star pattern appears near the peak price of 3,436.50, accompanied by a shooting star pattern that reinforced the bearish reversal, allowing for potential short trades. Another Evening Star pattern formed around 3,321.14, signaling a bearish reversal after the bulls were unable to break through resistance. Increasing tick volumes during these patterns confirmed the bearish sentiment. Later, a series of bullish hammer patterns around 3,212.42 indicated the end of the downtrend.
2. Forex Market – AUDUSD, H1 Chart
On the AUDUSD H1 chart, the first signal of a trend reversal came from a shooting star pattern, marking the end of the uptrend. This was followed by an Evening Star pattern that incorporated another shooting star, adding to its strength. As the Evening Star formed, trading volumes increased, further validating the bearish reversal. At a critical support level of 0.6506, the appearance of opposing patterns—such as the Morning Star and Morning Star Doji—prompted bears to close their short positions.
3. Stock Market – NIKE (H4 Chart)
On the H4 chart for Nike stock, the price was consolidating between 128.68 and 123.47. A breakout from this range could occur in either direction, but a bearish breakout was likely due to several bearish reversal patterns near the local peak. The initial bearish signal came from an Engulfing pattern, followed by a "hanging man" that signaled price exhaustion. An unusual Evening Star pattern later developed, with gaps after the second candle highlighting strong selling pressure. Additional confirmation came from a dark cloud pattern and another bearish engulfing pattern, solidifying the downward momentum.
4. Futures on the S&P 500 Index, D1 Chart
In early 2022, the global economy faced challenges such as rising inflation, tighter central bank policies, and geopolitical tensions, contributing to significant declines in the S&P 500 index. The bearish market phase was marked by Evening Star patterns at historical highs, supporting the larger Ascending Wedge pattern. This combination signaled a strong reversal, leading investors to close long positions as the index transitioned into a bearish trend.
Understanding the Evening Star Pattern
A candlestick pattern visually represents stock price movements, displaying the open, high, low, and close prices within a specific timeframe. Each candlestick has a central body and two wicks, with the candle’s length indicating the price range. Long candles show significant price movement, while short candles suggest minimal changes.
The Evening Star pattern is a strong indicator of potential price decline, forming over three consecutive days:
Day 1: A large bullish candle appears, reflecting a continued upward trend.
Day 2: A smaller candle follows, showing a modest rise in price.
Day 3: A large bearish candle emerges, opening below the previous day’s close and ending near the midpoint of the first day’s candle.
What Does the Evening Star Pattern Indicate?
The Evening Star pattern consists of three distinct candles, each corresponding to a trading day:
Middle Candle’s Role: The second candle, known as the “Star,” is the first sign of weakness in the prevailing uptrend. Although there’s often a gap between it and the previous candle, it reveals the buyers’ inability to sustain higher prices, with its small body signaling a lack of momentum. The color of this candle is less important than its size.
Weakness Confirmation: The third candle, which is bearish, confirms the weakness introduced by the Star. It closes within the range of the first candle’s body, emphasizing the reversal.
Bearish Trend Expectation: This sequence suggests a bearish reversal. Buyers from the first candle’s rally may begin to sell, adding pressure and fueling the downtrend.
Formation of the Evening Star Pattern
The Evening Star pattern forms in three stages:
First Candle: A strong bullish candle appears, indicating control by buyers and a continued upward trend.
Second Candle: The next candle opens with a slight upward gap, but momentum fades, resulting in a small body, which may resemble a shooting star or a hanging man. Occasionally, it may appear as a doji, signaling market indecision and increasing bearish pressure.
Third Candle: This candle often opens with a slight gap down, though a gap isn’t always present. It’s a large bearish candle, signaling that sellers have taken control and are pushing prices down.
To confirm a strong reversal signal, the body of the third candle should be at least half the size of the first. If it fully engulfs the first candle, this could indicate a sharp downward move.
The Evening Star can also appear during periods of consolidation around a strong resistance level, highlighting the waning strength of the bulls.
How to Recognize the Evening Star Pattern
To spot an Evening Star pattern, look for these key elements:
Existing Uptrend: The market should be trending upward, marked by higher highs and lows.
Day 1 – Large Bullish Candle: A sizable bullish candle signals robust upward momentum, often with a gap up on the second day.
Day 2 – Small Bearish/Bullish Candle: The second candle is small, often resembling a doji. It typically opens with a slight gap up, showing indecision and a potential weakening of the uptrend.
Day 3 – Large Bearish Candle: The third candle initiates a new selling phase, and in non-forex markets, it opens below the previous close. This signifies the beginning of a bearish trend.
Pros and Cons of the Bearish Evening Star Candlestick Pattern
Advantages | Disadvantages |
Clear Visual Cue for Bearish Reversals: The pattern offers a visually distinct signal of a decline in price momentum. | Limited Utility Due to Rarity: Its infrequent occurrence reduces its practicality for regular use. |
Helps Spot Selling Opportunities: Traders can use this pattern to identify potential exit points from long positions or to consider short trades. | Potential for False Signals: There is a risk of misleading signals, which may lead to losses if relied upon exclusively. |
Simple Structure for Quick Recognition: The pattern follows a recognizable format with specific candlestick setups, making it easier to identify. | Requires Confirmation for Reliability: Additional technical analysis or indicators are often needed to confirm the pattern’s validity. |
Applicable Across Various Markets: The pattern can be used across different timeframes and financial markets, adding to its versatility. | Effectiveness May Vary with Market Conditions: Changes in market trends or conditions can affect its reliability, necessitating cautious risk management. |
How to Trade the Evening Star Pattern
The Evening Star is a popular tool among traders due to its efficiency and ease of identification. Here are three effective trading strategies that incorporate the Evening Star pattern.
1. Trading with Resistance Levels
This approach involves initiating a short position after the Evening Star pattern forms near a key resistance level. For instance, in the NZD/USD M30 chart, the Evening Star appears below the 0.6085 resistance level. After a slight decline, the price tests this resistance again but fails, forming a second Evening Star and breaking downward. Entering a short position after the first or second pattern would yield different profit outcomes, with the first pattern providing higher potential gains. A stop-loss could be set slightly above the resistance at 0.6090, while partial profits could be taken with a take-profit range around 0.6044 to 0.5999.
2. Using the Evening Star with Other Candlestick Patterns
This strategy suggests using additional candlestick patterns for confirmation. In the example of the 4-hour chart for eBay stock, an Evening Star pattern appears at the resistance level of 59.02, followed by bearish patterns like a hanging man, a bearish marubozu, and a shooting star. These patterns collectively signal declining bullish momentum, providing further confirmation for a short position. A position could be opened around 57.05, with a stop-loss above resistance at 59.51 and profit targets at levels such as 55.21, 53.35, 50.42, and 47.28. Reversal patterns, such as the Hammer and Bullish Counterattack, indicated an opportune time to close the position as quotes began to rise.
3. Trading the Evening Star with Technical Indicators
This hybrid approach combines candlestick analysis with technical indicators. For instance, in a UKBRENT daily chart, the Evening Star pattern is paired with the Money Flow Index (MFI), Stochastic oscillator, and MACD indicators. During the formation of the Evening Star, both MFI and Stochastic exit the overbought territory, signaling potential for a price reversal. The MACD also supports the downward trend by crossing into the negative zone. This setup allows for a short position around 92.00, with a stop-loss at 96.47 and a target around 82.58, a strong support level. The formation of a Morning Star pattern, along with a gap between candles, indicates it might be time to close the short position.
Accuracy of the Evening Star Pattern
The Evening Star pattern has an approximately 70% reliability rate in predicting bearish reversals. However, the post-reversal movement often yields modest results, with only a 50% probability of achieving the expected target price. Therefore, while the Evening Star pattern can be useful, it is best combined with other indicators to support trading decisions.
Comparing the Evening Star and Morning Star Patterns
Evening Star | Morning Star |
Signals a downward reversal, indicating a potential shift from an uptrend to a downtrend. | Indicates an upward reversal, suggesting the end of a downtrend and a potential price increase. |
Forms at the end of an uptrend, typically at or near recent highs. | Forms at the end of a downtrend, usually at market lows. |
Consists of a bullish candle, followed by a small-bodied candle (red or green), and then a bearish candle. | Consists of a bearish candle, followed by a small-bodied candle (bullish or bearish), and then a bullish candle. |
Often used to open short positions, with a stop loss placed above resistance. | Typically signals a buying opportunity, with a stop loss below support. |
FAQs
What is the Evening Star Pattern?
The Evening Star is a candlestick pattern used in technical analysis that signals a shift from upward to bearish momentum.
What does the Evening Star indicate?
It forms at the peak of an uptrend and suggests the potential end of that trend.
How do you confirm an Evening Star?
Confirmation requires three candles: an initial strong bullish candle, a small-bodied second candle, and a significant bearish candle to validate the reversal.
How accurate is the Evening Star pattern?
According to Bulkowski’s Pattern Site, the Evening Star has a 71% accuracy rate in predicting bearish reversals. However, it’s advisable to use it alongside other indicators for better reliability.
What does the Evening Star pattern signify?
The pattern indicates the start of a downtrend over a three-day period, marking a potential bearish market shift.
