The Evening Star Candlestick Pattern is considered one of the strongest patterns indicating the emergence of heavy selling pressure from sellers. 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 Evening Star Candlestick Pattern:
It consists of three candles:
- The first candle is a bullish candle.
- The second candle is a small bearish (red) candle, with the condition that its closing price is separated from the close of the first candle and the opening of the third candle, as shown.
- The third candle must have its full body below the second candle, and this is an important condition for the validity of the pattern.
It is a bearish reversal pattern that forms only in resistance zones, signaling a shift from an uptrend to a downtrend.
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 Evening Doji Star.
The Psychology Behind Its Formation:
At the end of an uptrend, when the first green candle of the pattern forms, a second small candle begins to develop above the first candle. The body of this candle, covering the opening and closing prices, forms above the body of the first candle. It is important that there is a gap between the closing price of the first candle and the closing price of the second candle, indicating the last remaining strength of buyers pushing prices higher.
Then, a third red candle forms below the close of the second candle, and there is also a gap between the second candle’s close and the opening of the third candle. This reflects the strength of sellers, as they step in with strong selling pressure to reverse the trend from bullish to bearish.
How Do We Trade Using This Pattern?
When this pattern appears at a resistance zone within a downtrend, we enter a sell trade immediately after the pattern is completed. The stop loss is placed above the pattern, and the targets, as shown on the chart, are set at three times the stop loss distance.
