Morning star and evening star: three-candle reversal patterns

The morning star and the evening star are three-candle patterns that describe a move losing momentum, pausing, and then reversing. A morning star forms after a decline and points to a possible turn up; an evening star forms after a rally and points to a possible turn down. Because they take three candles to complete, they are slower than single-candle signals but tell a fuller story.

The three candles

Morning star (after a decline):

1. A large bearish candle continuing the decline.
2. A small-bodied candle, bullish or bearish, or a doji, showing that selling has stalled.
3. A large bullish candle that closes well into the body of the first candle, commonly beyond its midpoint.

Evening star (after a rally) is the mirror image: a large bullish candle, a small-bodied pause, then a large bearish candle closing deep into the first one's body.

When the middle candle is a doji, traders often call it a morning doji star or evening doji star. The morning star and evening star glossary entries give short definitions.

What each candle says

• Candle 1: the existing trend is still in control.
• Candle 2: the move stalls. Neither side wins the period; this is the "star", small and often isolated.
• Candle 3: the other side takes over decisively, recovering a large part of candle 1.

The third candle is the important one. Without it you only have a trend and a pause, which happen all the time.

Gaps in 24-hour markets

Classic descriptions, written for stock markets, say the star should gap away from the first candle, and the third candle should gap back. Stocks close overnight, so gaps are common there.

Forex trades continuously from Monday to Friday, and Sky Trade's OTC series tick every half-second around the clock, so each candle usually opens at the previous close. Real gaps in these markets appear mainly after weekends or very sharp news. In practice, traders apply the pattern without the gap and look for the star's body to sit at the extreme of the move, below candle 1's close for a morning star or above it for an evening star. That relaxation makes the pattern more frequent, and therefore less selective, than its textbook version.

A worked example

NZD/USD on M15 falls from 0.59600 to 0.59300 over an hour. The last large bearish candle opens at 0.59380 and closes at 0.59300, near a level that held twice last week.

The next candle is small: opens 0.59300, dips to 0.59270, closes 0.59295. Selling stalled at the level.

The third candle opens 0.59295 and closes at 0.59360, past the midpoint of the first candle (0.59340). That completes a morning star at support.

What a trader would watch next: does price hold above the star's low at 0.59270? If the following candles stay above it, the reversal idea holds. If price slips back under 0.59270, the pattern failed and the decline resumes, which happens often when the larger trend is still firmly down.

How the patterns fail

• Against a strong trend. A morning star in a steep downtrend is often just a pause before the next leg.
• Weak third candle. If candle 3 barely enters candle 1's body, the "takeover" is not convincing.
• No level. In the middle of a range, three candles of this shape are just normal movement.
• Lag. By the time the third candle closes, a good part of the move may be over. A pattern that needs three M15 candles takes 45 minutes to form.

Related patterns

The evening star often sits at the end of a run like three white soldiers, where momentum has been strong for several candles. A two-candle version of the takeover idea is the engulfing pattern.

Short expiries and OTC

Three candles on S15 or M1 cover less than a minute or three minutes of price action, and the shape forms frequently from noise. For short expiries, many traders look for these patterns on M5 or M15 at meaningful levels and accept that they appear less often.

On Sky Trade's OTC instruments, prices are generated by Sky Trade's server and do not follow any real market. The model makes the next move unpredictable, so a morning or evening star there is a coincidence of three random candles and has no predictive value.

How to use it in the Sky Trade terminal

Read the pattern on the Candles chart type and enable the candle timer so you act only after the third candle has closed. Marking the first candle's midpoint with a horizontal level makes it easy to judge whether the third candle went far enough.