Evening Star Pattern in Candlestick Trading


Trading securities can be a risky endeavor. To the untrained eye, it may look like a game of chance. As a person who deals quite a bit with complex finances, I understand the confusion. It’s important to know the patterns and an evening star pattern in candlestick trading is one of the best places to start learning.

An evening star pattern is a visual indicator that a reversal or bearish market is on the horizon. It appears after an uptrend and is composed of one long white candle, one short red candle, and a mid-sized candle.

Regardless of what you trade, being able to spot the patterns is vital. But what do you do with the knowledge once you have it? Keep reading for an in-depth guide to everything you need to know about an evening star pattern as it pertains to candlestick trading. 

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How to Identify an Evening Star Pattern in Candlestick Trading?

Spotting an evening star is easy once you know what you’re looking for. So, we’ve broken it down to help you identify the return of a bearish market. 

Construction and Key Characteristics of an Evening Star Pattern

Visually, an evening star resembled a mountain peak. It has a bullish and a bearish candle on either side of a small-bodied candle and is noticed after three consecutive trading sessions. It can be identified by the following attributes: 

  • Three lines: a large white candlestick, a small-bodied candle, and a red candle.
  • Long white candle: The first candle in the pattern happens thanks to buying pressures from the bulls. It represents rising prices and appears in the first session. 
  • A small candle: On the second day, there may continue to be a rise in prices, but it’ll pale in comparison to the long white candle of the first day. Typically, this candle is called a doji candle and means that neither buyers nor sellers pulled ahead in terms of profit. 
  • Mid-sized red candle:  On the third day, prices will have gone up more than the second day but won’t reach the buying power of the first. This candle will often open halfway down the second candle and will close halfway down the first.
  • A gap between the bodies of the two candlesticks: This is what makes the star and signals that momentum is slowing down.
  • Only after an uptrend: The evening star is a reversal pattern that predicts a pending downtrend. As such, it can only appear after an uptrend.

How to Interpret the Evening Star Patterns?

Take note that no pattern, evening star included, is 100% accurate all the time. And it should be analyzed with trends and market context but when the evening star appears here’s a few smart moves.

  • Sell Securities: The evening star means prices are going down, which makes it a great sell indicator. 
  • Entry Point: You can use the evening star to predict a cheaper entry point into a normally bullish stock.
  • Short the Stock: This technique is tricky and shouldn’t be attempted by the novice day trader. To short the stock, you’ll want to borrow a number of stocks from their owners. Then sell those stocks openly. Using the profits you’ve made, you then pay back the owner, essentially buying stocks at a lower value than they’re worth based on what you know to be an upcoming downtrend. 

Here’s the risk: when you sell those stocks on the open market, you may inadvertently raise the price of the security. Meaning you’ll end up shorting yourself. Proceed cautiously

How to Improve the Reliability of Evening Star Patterns in Candlestick Trading?

Any candlestick pattern needs to be used in conjunction with other indicators. Here’s how to make the evening star more reliable. 

  • RSI: The relative strength index is a key indicator of any pattern. An evening star is a short term insight into what may be for you a long term asset.  It’d be a bad idea to use a three-day pattern to judge a securities performance for years to come. Use the RSI to see how the stock performs over the long term.
  • MA: The MA or moving average can be used to show the consistent changes of a particular security by disregarding minor fluctuations in price that can skew data. There are a number of ways to calculate the moving average, but it’s worth noting that an MA works best in a market that follows trends as opposed to a divergent market. 

How to Trade Evening Star Patterns in Candlestick Trading?

Once you have a firm grasp of evening star patterns and how to make them more reliable, the question remains as to how to use them in a trading strategy. There are a number of strategies that work best with varying markets. Read on to learn more.

Trading an Evening Star Pattern with Momentum Trading

When trading the evening star pattern with momentum trading, below are a few things that you might want to consider:

Market Environment

Ideally, momentum trading would be done in a bullish trend following the market. Because momentum traders sell securities when they reach their peak, it’s vital to know when that peak is coming. 

Identify and Confirm Trade Opportunity

When the evening star appears on a security, and assuming you’ve factored in other indicators, then the security has reached its peak. In a perfect world, an investor will have the insight to sell the security prior to the emergence of an evening star. But utilizing the star will allow the investor to sell while the price is still relatively high and, if used correctly, can prevent you from staying with a stock far past its prime. 

Determine Trade Entry, Stop Loss, and Take Profit Levels

Use the Moving Average to analyze the history of a security to take note of when its price might dip, momentarily, lower. Once you’ve entered into the trade, set your stop loss at 5%. The take profit level is when the stock has reached its price peak. In terms of momentum trading in a bullish market, you’ll rarely want to sell prior to the peak.

Execute and Manage Trade

Momentum trading is ideal for a trend following a bullish market and shouldn’t be applied to a divergent or bearish market. There are a few points to take note of to understand successful trading within the momentum strategy:

  • Monitor your securities daily: An evening star is a short term pattern. Especially when combined with a momentum strategy. You do not want or have the time to hang on to losing stock. Reinvest losing stock into uptrends. 
  • Learn the market context: Some securities consistently drop lower at certain times throughout the year. The reverse is true too. Use what you know about a particular security to inform your trading strategy. 
  • Monitor your stop loss: Remember to manually keep track of your losses as a rapidly fluctuating security can cause an automated stop loss to be bypassed.

Advantages and Limitations of Trading Evening Star Pattern

Evening star pattern is broadly used by traders following a diverse set of investment strategies. However, in leveraging this pattern to make trading decisions, it is critical that you account for its advantages and limitations. 

Therefore, in the following sections, let us take a quick look at the following strengths and weaknesses of this pattern. 

Advantages of Trading Evening Star Pattern

Listed below are the key advantages of trading the evening star pattern – 

  1. It makes predicting potential market reversals quite easy
  2. It is one of the easier to spot and identify patterns
  3. It can be applied to a number of different trading strategies

Limitations of Trading Evening Star Pattern

Listed below are the key limitations of trading the evening star pattern – 

  1. It only leverages the short term data and is therefore not very useful for long term trading
  2. It can cause false positives if not used with complementary technical indicators

Candlestick Pattern Opposite to an Evening Star Pattern

The opposite of an evening star is a morning star. A morning star pattern predicts an uptrend and is constructed over three consecutive sessions. Visually, because the morning star appears as a reversal of a downtrend, it appears as an opposite formation to the evening star. 

Author’s Recommendations: Top Trading and Investment Resources To Consider

Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.

Conclusion

The evening star is a rare but prevalent candlestick pattern. However, there are a number of other candlestick patterns that every successful trader must know. Check out our related articles to gain a deeper understanding of candlestick trading. Always remember that even experienced traders suffer losses. Trading is a risk. Make it a calculated risk.

BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!

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    Navdeep Singh

    Navdeep has been an avid trader/investor for the last 10 years and loves to share what he has learned about trading and investments here on TradeVeda. When not managing his personal portfolio or writing for TradeVeda, Navdeep loves to go outdoors on long hikes.

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