Morning Star Chart Pattern
Type: Bullish Reversal Pattern
Appearance: The morning star is a 3-candle bullish reversal formation characterized by a strong black candle (downward), followed by a small body white (upward) candle, followed by bigger white candle. The third candle does not need to breach the top of the first candle's body.
Typical Duration: 3 candles
Description: The morning star formation is a sign that the selling pressure by the bears has either let up, or that buying pressure has increased, and that a rise may be imminent (hence the name morning star, which forecasts the rising sun). The first candle represents a normal continuation of the down-trend. The second candle represents the market's indecision (indicated by a small body), and the third candle represents the scales tipping in favor of the bulls. It is important to understand the 3 main criteria:
- First we must have a discernible down-trend. The morning star formation is only valid in down-trends.
- We have a long black body as the first candle in the actual morning star formation.
- The second candle, or the actual star, GAPS away from it in the direction of trend (downward) but has a small body, signaling indecision in the market, or bear exhaustion after a strong move.
- Finally, we have a strong move up signalled by a white candle that has a larger body than the second, but smaller than the first candle.
Ideally, there should be a gap on both sides of the second candle, but gaps are somewhat rare in the forex because it is a 24/5 market, so we have no choice but to ease up on the gap criteria.
Strengths: The morning star chart pattern is a strong indication of a major market bottom. It may not be the end of the trend, but it has a high probability of success over the next 4-5 candles, and quite possibly more.
Weaknesses: The fact that gaps are rare in the forex forces us to either use less strict crieria, or risk never taking advantage of the pattern. The first results in a lower probability of succes and latter results in a lower frequency of trades based on the morning star pattern.
How to Trade It: Wait for the pattern to close (normally on daily charts). Enter a long position and set a target that is twice the length of the first candle or more, depending on results of other technical or fundamental analysis - in other words your assessment of the probability of this being a major bottom, or a minor one. Stop losses should be set below the bottom of the morning star's low.
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