Price Action Candlesticks Patterns

Knowledge of current economic events is a fundamental element of effective trading. In the case of currency pairs and indices, the ability to use the calendar is already satisfactory. Nevertheless, to assess market sentiment, it is worth following current events. In the case of instruments such as shares, tracking information from companies is a necessity.

Morning Star

Morning Star Pattern: A Signal of Bullish Reversal

Introduction: The "Morning Star" pattern is a popular technical analysis pattern that often appears on price charts of financial instruments. It is a reversal pattern that signals the potential end of a downtrend and the beginning of an uptrend. In this article, we will take a closer look at the "Morning Star" pattern, its structure, significance, and how to trade based on this pattern.

What does the "Morning Star" pattern look like? The "Morning Star" pattern consists of three consecutive candles:

First Candle: This is a long bearish candle, indicating the continuation of the downtrend.
Second Candle: This is a small candle with a small body or a long lower shadow, which can be either green or red. This period of consolidation or hesitation suggests that selling pressure is weakening.
Third Candle: This is a long bullish candle that opens above the close of the previous candle. This indicates that demand has overtaken supply, signaling the potential end of the downtrend and the beginning of an uptrend.

Important Information about the "Morning Star" Pattern:

The "Morning Star" pattern is more powerful when it appears at the bottom of a long-term downtrend.
The larger the gap between the first and second candles, the stronger the reversal signal.
The strength of the "Morning Star" pattern can be confirmed by an increase in volume on the third candle.

How to Trade Based on the "Morning Star" Pattern?

Market Context: Before entering a trade based on the "Morning Star" pattern, it is important to check if the pattern appears in the appropriate market context. The best results are seen when the "Morning Star" pattern appears at the bottom of a long-term downtrend.
Signal Confirmation: The "Morning Star" pattern is stronger when confirmed by other technical analysis tools, such as oscillators (e.g., RSI, stochastic) or price formations (e.g., double bottom).
Placing a Buy Order: Once confirmation occurs, traders can place a buy order above the high point of the third candle.
Setting a Stop Loss: A stop loss can be placed below the lower shadow of the third candle or below the lowest point of the "Morning Star" pattern.
Take Profit: Various take profit strategies can be applied, such as exiting the position after reaching a specified profit level or trailing the candles on higher time frames and closing the position when reversal signals appear.

Summary: The "Morning Star" pattern is a strong reversal signal that can be an effective tool for traders seeking potential entry points in the market. However, as with any trading strategy, it is recommended to confirm the signal and apply proper risk management rules.