Trading using candlesticks in the Forex market gives us the advantage of finding many patterns that may often be overlooked using a traditional bar chart. The patterns are groups of candles that can assist technical traders in spotting both continuations and reversals in price. With this in mind, today we will focus on another potential market reversal pattern using candles stick analysis. Let’s learn to identify and trade the bearish evening star pattern.
What is a bearish evening star?
A bearish evening start pattern is another candle pattern hinting at a turn during an established uptrend. Pictured above the pattern is created by interpreting the data of three completed candle sticks. The first two candles are important because they depict the last strength of an existing uptrend. It is important that the second candle be a continuation of the move up, but a late day sell-off should make the candle close near the daily open.
The third candle in the pattern is used as a confirmation point. A bearish candle is needed to signal the market begining a strong sell off at this point.Preferably a large red candle should be formed with the high of the third candle approximately equal to that of the opening price. This suggests that price sold off immediately upon the candle opening, leaving little uncertainty in the market of its new direction.
(Created using FXCM’s Marketscope 2.0 charts)
Uses in Trading
Once you are familiarized with identifying the bearish evening start pattern it can then readily be applied to trading virtually any chart. Depicted above is an example of the pattern in action on a daily GBPNZD chart. From February the 15th through May 23rd the GBPNZD rallied as much as 2424 pips. This considerable uptrend spanned over 4 months and was concluded with the formation of a bearish evening star.
Normally traders choosing to look for evening stars like to trade breakouts in the direction of the new downtrend. One way to do this is to plan entry orders underneath the low of the first candle in the pattern. This ensures that a lower low has been established prior to market entry. Another popular method to trade this pattern is in conjuncture with oscillator divergence. When paired with an indicator like MACD, both signals can help spot reversals and better plan market entries.
---Written by Walker England, Trading Instructor
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