Morning start, you might not associate the term remotely with technical trading. But the truth is, it is a popular candlestick pattern that indicates market trend reversal in a downtrend.
Candlestick patterns become popular among western trading fraternity during the 90s. In 1991, Steve Nison introduced candlestick charts to the western traders, and now it has become mainstream in technical trading.
If you aren’t a seasoned trader, who daily deals with charts and graphs, you may find it difficult to understand a candlestick pattern at first. But worry not! We will help you in understanding a morning star pattern and how to plan a trade around it.
At first, it may seem a bit tricky, but it is quite simple. A morning star pattern is a visual pattern made of three candlesticks. Analysts usually interpret it as a bullish sign. As in, an indicator that a trend will climb up after a fairly downward trend. Traders look for a morning star candle pattern formation in the charts, then use other indicators to confirm that a reversal of the previous price trend is occurring.
As you can see, in the first part of the pattern, a large bearish downward trend is established. On the second day, the downward gap is very small, and the price is not pushed much lower than day 1. The downward trend is said to be fatigued at this point. Day 3 begins with an upward bullish trend, leading up to the trend reversal pattern. While the upward gap is not as big as the downward gap of day 1, it eventually leads to neutralizing of the losses.
Inferring morning start pattern will require some more understanding. The small gap on day 2 can be bearish, bullish or neutral. A neutral gap forms a morning Doji star, which is a variation of the morning star that represents indecision in the market. Generally, a bullish gap foretells a trend reversal. However, it is day 3 that holds the most importance and signals true development.
Of course, a question will arise, what a Doji’ morning star is. Doji start is also part of the candlestick family. It appears when the market is in an indecisive state.
When the price action is essentially flat on day 2, the middle candlestick will be small with no obvious wicks.
The doji morning star candle pattern displays market indecision better than a morning star with a thick middle candle. A doji after a downward candle invites an aggressive volume spike, and consequently, a long upward candle as traders clearly identify the formation of a morning star.
How can you use the morning star to trade?
Morning star stock patterns are visual indicators of a trend reversal from downward to upwards. But they should also be grouped with other technical indicators. Volume is an important factor, for example. You want to see the volume increase through the course of the pattern, with day 3 seeing the most volume. If high volume and subsequent uptrend are observed, then the pattern is confirmed, irrespective of other indicators. Once the formation is complete over 3 days or sessions, traders can enter at the open of the next candle and ride the uptrend. Conservative traders delay their entry to observe the price action- to be sure that the stock prices are indeed increasing. However, in fast-changing markets, you could enter at a worse level with any delay. You and I both know that there are no guarantees in the market. You should always maintain a positive risk-to-reward ratio.
However, here is a word of caution. Relying solely on visual patterns, while trading is a risky venture. A morning star stock pattern should be considered when it is backed by volume and other technical indicators, like a support level.
What Is the Morning Star Pattern?
The Morning Star is a candlestick pattern that forms at the bottom of a downtrend, signalling a potential upward reversal. It consists of three candles: a large bearish candle, a smaller candle (bullish or bearish) that indicates indecision, and a large bullish candle confirming the reversal.
When this pattern appears, it suggests that selling pressure is fading, and buying momentum may be starting. A variation, the Morning Star Doji, occurs when the middle candle has no body, providing an even stronger reversal signal. Gaps between the candles further reinforce the pattern’s validity.
How to Identify a Morning Star Pattern?
- The Morning Star pattern is typically formed at the bottom of a downtrend or during prolonged consolidation, signalling a potential trend reversal.
- The first candlestick in the pattern is bearish, representing a continuation of the downtrend.
- A small gap often forms between the first and second candlesticks, marking the shift in momentum.
- The second candlestick is short-bodied, either a small bullish or bearish candle or a doji, symbolising indecision and the weakening of the bears’ control.
- A gap may appear between the second and third candlestick, further confirming the reversal signal.
- The third candlestick should be bullish and overlap the first bearish candlestick by at least half. This demonstrates that the bulls have gained momentum.
- In some cases, the third candlestick may completely or significantly overlap the first one, strengthening the pattern and confirming the trend reversal.
- The Morning Star pattern highlights that the market is shifting towards a bullish phase, with potential for upward movement in the following trading sessions.
- Once the pattern is confirmed, traders may look to open long positions, anticipating a sustained uptrend.
- As the pattern develops, the price typically rises, indicating the continuation of the bullish trend.
Advantages and Disadvantages of Morning Star Pattern
The Morning Star pattern, like any candlestick formation, has its advantages and limitations. It is essential to follow proper risk and money management strategies when using this pattern for trading.
Advantages:
- The Morning Star indicates a potential trend reversal at the bottom of a downtrend, allowing traders to enter long positions at more favourable prices.
- It is applicable across various financial markets, including Forex, stocks, commodities, and cryptocurrencies.
- The pattern works across different timeframes, from short ones like M5 to longer-term charts such as MN. The higher the timeframe, the more reliable the signal.
- It provides clear entry points, stop-loss levels, and price targets, aiding in setting up trades.
- The pattern is easy to spot on price charts, making it accessible to traders of all experience levels.
Disadvantages:
- On lower timeframes, the Morning Star pattern may produce false signals due to the higher market noise.
- It requires confirmation through additional candlestick patterns, chart patterns, or technical indicators to enhance accuracy.
- The pattern is less effective in highly volatile or choppy market conditions.
How to Trade Using the Morning Star Pattern?
The Morning Star pattern signals a potential reversal from a bearish trend to a bullish one, particularly when supported by other technical indicators. Volume plays a key role in validating the pattern, with increasing volume across the three sessions, peaking on the third day. High volume on the third day confirms the pattern, suggesting an uptrend. Traders typically enter a bullish position when the Morning Star pattern is fully formed, riding the uptrend until signs of another reversal emerge.
Here are effective strategies for trading the Morning Star pattern:
- Stop-loss placement: Protect your investment by placing a stop-loss order at the lowest point of the pattern, which acts as support. If the price breaches this level, it may signal the reversal pattern is invalid. This helps limit losses if the trade doesn’t go as planned.
- Entry points: Look for the Morning Star pattern following a downtrend. The first candlestick should be bearish, indicating selling pressure. The second, a smaller candle, shows indecision. A bullish third candle confirms the potential reversal. Enter the trade when the next candle opens.
- Profit target: Measure the distance between the low of the first candle and the high of the third candle. From the breakout point, project this distance upward to set your potential profit target.
- Risk management: Implement solid risk management practices, including setting a suitable risk-reward ratio for each trade. Ensure that potential losses are limited while allowing for adequate profit opportunities. Adjust risk management strategies as market conditions change.
FAQs
What are the rules for the Morning Star pattern?
The Morning Star pattern consists of 3 candles: a large bearish candle followed by a smaller candle (which can be bullish, bearish, or a doji), and a large bullish candle confirming the reversal. It typically forms at the bottom of a downtrend and signals a potential trend reversal.
How to read the Morning Star pattern?
To read the Morning Star pattern, first identify it at the bottom of a downtrend. The first candle should be a large bearish candle, indicating strong selling pressure. The second candle, smaller and sometimes a doji, represents market indecision. The third candle is a large bullish candle, ideally overlapping the first one, which confirms the reversal. Gaps between the candles, particularly between the second and third, help validate the pattern.
Is a Morning Star bullish?
Yes, the Morning Star is a bullish pattern that signals a potential reversal from a downtrend to an uptrend. It suggests that selling pressure is fading, and buying momentum may be gaining strength.
