The Morning Star Pattern is considered one of the strongest Japanese candlestick patterns that indicates the emergence of very large buying activity from buyers. It also provides excellent entry points for traders across different financial markets.
So, what are the conditions for this pattern to form?
Where does it appear?
What is the psychology behind its formation?
How do we trade using this pattern?
Definition of the Morning Star Pattern:
It consists of three candles:
- The first candle is a bearish candle.
- The second candle is a small bullish (green) candle, with the condition that its closing price is separated from the closing of the first candle and the opening of the third candle by a gap, as illustrated.
- The third candle must have its full body closing above the body of the second candle. This is an important condition for the validity of the pattern.
It is a bullish reversal pattern that forms only at support zones, turning a downward wave into an upward trend.
Sometimes, the second candle appears as a Doji candle, which psychologically represents balance between buyers and sellers. In that case, the pattern is called the Morning Doji Star.
The Psychology Behind Its Formation:
At the end of a downtrend, when the first red candle of the pattern forms, a small second candle begins to form below the first candle. The body of this candle, which includes the opening and closing prices, is formed below the body of the first candle. It should be noted that there must be a gap between the closing price of the first candle and the closing price of the second candle, indicating the last remaining strength of the sellers to push prices lower.
Then, a third green candle forms above the close of the second candle, and there is also a gap between the close of the second candle and the opening of the third candle. This reflects the strength of buyers, as they enter with strong buying pressure to reverse the downward wave into an upward trend.
How do we trade using this pattern?
When the Morning Star Pattern appears at a support zone within an uptrend, we enter a buy trade immediately after the pattern is formed, place the stop loss below the pattern, and set targets at three times the stop loss distance, as shown on the chart.
