Introduction
Morning Star Candlestick Pattern is a bullish reversal pattern formed by a tall red body candlestick, a second candle with a small red body that gaps below the first red body to form a doji, and a third green candle that closes well into the first red candle.1NCFM Technical Analysis Module – https://www.nseindia.com/learn/self-study-ncfm-modules-intermediate-technical-analysis-module
It was Steve Nison who popularised the Morning Star Candlestick Pattern. It originally being a part of Japanese charting, now is a common tool in modern technical analysis.
“The Morning Star is a visual sign that the bulls are starting to take control after a downtrend.” ~ Steve Nison 2Japanese Candlestick Charting Techniques, 1991
Also Read: The Best Doji Candlestick Trading Strategy For Beginners
Pattern Indication
This candlestick pattern indicates that downtrend may be nearing an end and a new uptrend might begin. Thus, it can be concluded that price of the stock / index will go up after formation of Morning star.
Traders use the Morning Star Pattern as a technical indication to either buy long positions or cut short positions.
“The Morning Star pattern is a strong indication of a reversal in trend, especially when supported by high volume on the third candle” – Steve Nison 3Japanese Candlestick Charting Techniques, 1991
How to Identify Morning Star Candlestick Pattern
The following are the indications which are responsible for the formation of Morning Star Candlestick Pattern:
- Presence of Downtrend
- Formation of Red First Candlestick
- Gap between First and Second Candlestick
- Formation of Green Third Candlestick
- Magnitude of the Third Green Candlestick
Presence of Downtrend
There needs to be a clear and established downtrend before formation of a Morning Star Candlestick Pattern. Morning Star pattern are indication to the formation of trend reversal from downtrend to uptrend.
Only when there is a trend to reverse, does a Morning Star pattern have any significance.
The Morning Star loses significance in the absence of downtrend because it is intended to indicate the end of negative momentum.
Formation of Red First Candlestick
The first candlestick pattern of the Morning Star is a large bearish candle (red candle). The formation of this first red candle indicates a strong selling pressure and that the downtrend is continuing.
The candlestick should be significantly large, and closer to its lows, which can confirm the possibility of trend reversal.
Gap between First and Second Candlestick
When the second candle opens below the close of the first candle, a gap down is created. This indicates that the sellers have dominated.
If the second candle is small / forms a Doji, it could be predicted that the momentum of sellers have reduced.
Formation of Green Third Candlestick
When the third candle is a large bullish candle, it can be interpreted that the buyers have dominated the market.
There is a trend reversal from down trend to up trend. The green candlestick confirms that there is a strong buying pressure. This third green candle gives the confirmation to the traders to take a long position.
Magnitude of the Third Green Candle
The larger the third green candle, the more powerful is the trend reversal. Ideally the third green candle should be closed at least above the mid point of the first red candle.
A powerful third candle indicates that the trend direction is shifting and shows a clear change in the market.
Conditions for Maximum Effectiveness
The morning star candlestick pattern is most effective in the following conditions:
- Appears near Support Level
- High Trading Volume on the Third Candle
Appear near Support Level
A Support Level is a price zone where buying pressure has historically been strong enough to reverse a downtrend.
The trend reversal is greatly increased when a Morning Star candlestick pattern is formed around the support level.
This is due to the fact that the support level acts as a psychological floor for traders, making it more likely that buyers will dominate and the sellers will oppose to move the prices lower.
High Trading Volume on the Third Candle
When the third candle of a Morning Star forms with high trading volume, it signals that real buying interest has entered the market.
Large trading volumes indicate that institutional investors are buying, which results in more strength and sustainability towards trend reversal.
Conclusion
The Morning Star Candlestick Pattern is one of the most trusted bullish reversal signals in technical analysis.
Also, it is important to note that, the market context in which it appears has a significant impact on how effective it is for trend reversal.
You might also like: Unveiling The Secrets Of The Doji Candlestick Pattern
References & Citations
- 1NCFM Technical Analysis Module – https://www.nseindia.com/learn/self-study-ncfm-modules-intermediate-technical-analysis-module
- 2Japanese Candlestick Charting Techniques, 1991
- 3Japanese Candlestick Charting Techniques, 1991
