The concept of a star is a Japanese concept and it is coming from that part of the technical analysis and it has been embraced by the Western world quite fast. Japanese candlestick techniques are quite efficient and they can be of advantage for any trader.
Use Candlestick Charts
The first condition to take into consideration is the fact that the chart should be a candlestick chart, so basically not looking at a line bar or something else as this patterns apply only to candles. Like the two videos that are part of this article show, stars are a group of three candles that act as a reversal pattern.
Morning Star Pattern in Forex Trading
In the case that the pattern is coming after a falling trend, then it is called a morning star in the sense that bullish conditions should be expected. In the case of binary options, we should look to buy CALL options or place BUY orders if we are trading forex with CFDs. In the case the pattern is coming after a rising trend, then it is called an evening star and the trader should expect for bearish conditions.
Identifying Morning Star Pattern
These three candles are different, the first and the last one should look almost the same but having a different body (one red and the other one green, or the other way around) and the thing that makes this pattern recognizable is the small candle in the middle.
The body of this candle can be red of green, it doesn’t really matter for the whole interpretation of the concept. After identifying such a pattern it is important to keep in mind that price is forming it after a previous bullish/bearish trend and that means that bulls/bears would not give up that easy.
This basically gives the entry level for entering a position as one should wait for 50% retracement of the third candle to come and that to be the level to go long or short depending on the type of star you are looking at.
Morning and evening stars are, above all, reversal patterns and this is perhaps the most important feature that they have. Market is effectively taking a terrible fight between bulls and bears when these patterns are forming.
Bullish Morning Star
After a bullish morning star pattern, it is desired to see a retracement and that would be the right moment for BUY orders / CALL options. I would be extremely skeptical to see a star that is not followed by a retacement as if this is happening then there is the possibility that market will come back later and violently take the lows. In this case, the LONG position like the BUY CFD, clearly has no chance.
The key in any morning and evening star stays with the third candle as it is the reversing one so any Fibonacci measurement should be done using its length. Normal retracement levels are considered anywhere between the 50% and 61.8%. Like anything that is related to technical analysis, once again the Fibonacci levels are important as they are helping forex traders to find the perfect striking price after a morning or evening star pattern is formed.
Setting the Expiration Date when Trading Forex
The expiration date to be used depends very much on the time frame the pattern appears and it is worth nothing that the bigger the time frame, the most likely that the pattern will hold. If, for example, a morning or evening star is found on the five minutes chart, then most of the times market will come back and take the lows/highs as they are visible and everyone in this world is seeing them. However, trading with morning/evening stars is not that easy as identifying the pattern is a bit tricky.
Doji vs Evening Star
What confuses a lot of traders is the size of the second candle as it needs to be quite small, sometimes looking like a doji candle. According to the Japanese candlestick techniques, a doji shows uncertainty or hesitation showing that bulls, in an evening star pattern, are getting tired and the whole trend is starting to loose steam.
Stars are part of a vast reversal patterns chapter in analyzing charts with Japanese techniques and they are pretty complex.
You need to have the chart in the trading platform set up on the candlestick option as otherwise the candles are not being seen. If there are no candles, then we cannot see the patterns that are forming as the other two options to set up a chart are bars and lines. Japanese used these patterns way before the Western technical analysis field was born so a clear understanding is offering a competitive advantage in trading these turbulent markets.
More details and clear examples in the videos that are part of this article.