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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:

  1. First we must have a discernible down-trend. The morning star formation is only valid in down-trends.
  2. We have a long black body as the first candle in the actual morning star formation.
  3. 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.
  4. 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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