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 like pattern, 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

The pictorial representation of the candlestick pattern is provided below:

It was Steve Nison who popularised the Morning Star Candlestick Pattern. It originally a part of Japanese charting, which is 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

The formation of this pattern indicates that downtrend may be nearing to end and a new uptrend might begin.

Traders use the Morning Star Pattern as a technical indication to either buy long positions or cut short positions.

How to Identify Morning Star Candlestick Pattern

The following are the indications by which one can identify Morning Star Candlestick Pattern:

1. Presence of Downtrend
2. Formation of Red First Candlestick
3. Gap between First and Second Candlestick
4. Formation of Green Third Candlestick
5. Magnitude of the Third Green Candlestick

The details are as explained below:

Presence of Downtrend

There needs to be a clear and established downtrend in the chart. Morning Star pattern are indication of trend reversal from downtrend to uptrend.

The downtrend may be depicted continuous downfall or down trends in the prices, which can state that the sellers have dominated the market.

The Morning Star might lose its 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:

1. Appears near Support Level
2. 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 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

• 1
  NCFM Technical Analysis Module – https://www.nseindia.com/learn/self-study-ncfm-modules-intermediate-technical-analysis-module
• 2
  Japanese Candlestick Charting Techniques, 1991