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Evening Star Chart Pattern

Type: Bearish Reveral Pattern

Appearance: Following an up-trend, we see a large bodied white (up) candle, followed by a gap and a small bodied candle of either color. This is then followed by a large black (down) candle - although not larger than the first white candle in the pattern.

Typical Duration: 3 candles

Description: The evening star pattern is the exact opposite of the morning star, and it predicts lower prices in the near future (the setting sun). The small bodied candle, or the star, is the first warning that the trend may be losing steam. The third candle is considered to be confirmation of the fact. Strictly speaking, there should be a gap between the first candle and the star, and between the star and the last candle. The second gap is not necessary for the pattern to be considered an evening star. The first gap is considered necessary in most markets, but not in the forex, since it is a 24 hour market, and gaps generally only happen on weekends. A confidence signal is given by the depth to which the third candle penetrates the body of the first candle. So let's sum it up:

  1. We need a definite up-trend for the evening star pattern to be feasible.
  2. We need a strong up-candle to signal a last push by the bulls. Ideally there should be a gap at both ends of this candle, or only at the left side, but in forex we can skip this requirement.
  3. Next, we need a short body candle (of either color) to be the first sign of bulls losing momentum.
  4. Lastly, we need a long body down-candle as a sign of bears gaining control of the market. The farther this candle pierces into the body of the last bull candle, the more confident we can be about the evening star pattern's probability of success as a major reversal point.

If any of the above conditions are not met, it is not advisable to trade this pattern.

Strengths: The evening pattern is considered to be a reliable trend change signal. It does not have to been seen as a reversal of the long-term trend, but it does often precede strong, tradeable retraces.

Weaknesses: There is no inherent take profit target, so we are left either improvising one (say twice the length of the first candle), or using another method of analysis to determine the best target price. Since we abandoned the pre-star gap as a necessary requirement, we have also lost some of the reliability that this pattern carries in other markets.

How to Trade It: After the pattern has closed, we can enter a trade immediately. As we mentioned earlier, choosing a target based on the evening star pattern alone can be a bit of a guessing game, so it advisable to use another method of analysis to set a reliable take profit target. Stop loss orders can be set just beyond the high of the evening star, in case the pattern fails to produce a strong enough retrace for us to take profit on our trade.

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