Morning & Evening Star [TradingFinder] Stock Indices Gap Candle

14 mar

🔵Introduction

In "technical analysis", there are certain reversal patterns that alert us to a potential reversal of a stock's previous trajectory.

Two significant patterns in this regard are the "Morning Star" pattern and the "Evening Star" pattern, which are formed by a combination of three different candlesticks and are considered as reversal patterns.

Here, we will examine how to identify these patterns and how to respond to them.



🟣Morning Star Pattern
This pattern forms at the end of a downtrend and indicates the beginning of an uptrend.

The pattern consists of three candlesticks in the following order:

1.A large bearish candlestick
2.A candlestick with a short body
3.A bullish candlestick

With the formation of the morning star pattern, it is expected that the stock price will change direction and continue to rise. Therefore, in such situations, it is advisable to enter a long position and follow the uptrend.



Signs of the morning star pattern:

•The first sign of this pattern is the presence of a small-bodied candlestick at the end of the trend, accompanied by a gap from the previous candlestick (a bearish candlestick with a large body). Therefore, the bodies of the first and second candlesticks do not overlap.

•The second candlestick indicates market confusion and uncertainty. The color of the middle candlestick is not significant.

•The third candlestick must be positive and have a higher price than the previous candlestick (i.e., the small-bodied candlestick).

•The closing price of the third candlestick must be higher than half of the first candlestick.

🟣Evening Star Pattern
This pattern forms at the end of an uptrend and indicates the beginning of a downtrend.

The pattern consists of three candlesticks in the following order:

1.A large bullish candlestick
2.A candlestick with a short body
3.A bearish candlestick

With the formation of the evening star pattern, it is expected that the stock price will change direction and continue to fall. Therefore, in such situations where this pattern is identified, it is advisable to refrain from entering a long position.

If the stock is traded in a two-way market, it is possible to profit by taking a short position after the formation of the evening star pattern.



Signs of the evening star pattern:

•The first sign of this pattern is the presence of a small-bodied candlestick at the end of the trend, accompanied by a gap from the previous candlestick (a bullish candlestick with a large body). Therefore, the bodies of the first and second candlesticks do not overlap.

•The second candlestick indicates market confusion and uncertainty. The color of the middle candlestick is not significant.

•The third candlestick must be negative and have a lower price than the previous candlestick (i.e., the small-bodied candlestick).

•The closing price of the third candlestick must be lower than half of the first candlestick.


🔵How to Use

The "Filter" and "Market" features are available in the settings section, allowing you to customize the output of the indicator according to your needs.

With the "Filter" feature, you can filter the "Morning Star" and "Evening Star" patterns as "strong" or "weak." The difference between strong and weak patterns lies in their "Candle Body."

In strong patterns, the candle bodies account for more than 80% of the total candle range, while in weak patterns, the bodies comprise between 60% to 80% of the candle range.

If the "Filter" feature is set to "On," only strong patterns will be displayed. If it's set to "Off," all patterns will be displayed. By default, it's set to "Off."



The "Market" feature allows you to include "gaps" in your pattern identification calculations. You can choose between "Forex" and "Stock" modes. In the Forex pattern, calculations are performed without considering gaps since there are fewer gaps in the Forex market.

If gap calculations were to be part of the pattern identification conditions, only a very small number of patterns would be identified. However, in the "Stock" mode, gaps are considered as part of the identification conditions.