Becoming a more accurate crypto trader involves learning how to recognise patterns on a price chart which are typically followed by certain market movements. One of the most reliable of these patterns is an evening star, which is a bearish signal that an uptrend is about to reverse. The opposite to an evening star pattern is a morning star, which suggests a bullish reversal on a previous downtrend. To fully understand what to look for and how to react to these patterns, it’s important to first know how to read a candlestick chart.
What is an Evening Star?
An evening star pattern consists of three candles. Firstly, a long green candle, often following a steady upward trend. This could give new traders false hope that the trend will continue for longer. The next candle in an evening star formation is another green candle but with a much more modest movement. The open and close of this candle should be close to one another and there will sometimes be an upward gap between this and the first candle. The third candle in the pattern will be a long red candle which takes the asset’s price back down to around the middle of the first day’s candle. An evening star formation typically signals the beginning of a new downward trend.
What is a Morning Star?
As opposed to an evening star, a morning star pattern signals a bullish reversal during a downward trend. The formation begins with a long red candle, signifying a weak day for the bulls. This is followed by a much shorter red candle where the open and close of that day are close to one another. Finally, a long green candle takes the price back up towards the middle of the first day’s candle, signalling that the bulls have taken back some power.
How to Trade an Evening Star or a Morning Star
Trading based solely on any visual candlestick pattern is risky. The nature of relying on the current price alone is that the events leading up to that pattern and things like volume and momentum aren’t considered. The appearance of either of these patterns should be a precursor to checking other technical indicators to back up what the formation is suggesting. There may also be other patterns such as dojis which appear within the evening star or morning star formations. It’s for this reason that it’s recommended to watch the markets whilst learning to spot the most popular charting patterns which traders use on a daily basis.
Evening stars and morning stars are considered reliable candlestick patterns, however it’s always best practise to understand what’s happening in the market with regards to volume and momentum. Technical indicators which use moving averages to be calculated can help determine whether a current price is high or low with regards to the average over a set number of days or weeks. If an asset is overbought or oversold, the chances are, the market will correct itself and move in the other direction. With that being said, evening stars and morning stars could be the first sign that this kind of move is about to happen.