Nomenclature: Names of candlesticks are metaphorical resemblance of their significance with the nature. As the evening star (name given to the planet venus) is only visible during evening times. It signifies the end of day and beginning of darkness. Similarly, evening star appears during an upward trend and signifies the reversal of price behavior from top to bottom i.e. fall in prices is approaching. This pattern is just opposite of Morning star.
Identification of Evening star patternYou should look for evening star pattern during a bullish trend i.e. when the prices of stocks or commodities are rising. Its appearance anywhere else is irrelevant. This candlestick pattern is composed of three candles:
- First one is a long bullish or green candlestick.
- Second candle have very small price range i.e. small body . It opens gapped-up from the previous candlestick and is known as the star candlestick. The color of star does not matter much, it can have any color but it have body of very small size .
- Third candle is a long bearish (red or black) candle that closes into the body length of first candletsick but atleast stretches to the half or middle part of first candle. The longer is the length of this candle, more is the strength of trend reversal but its length does not go beyond the first candlestick. This candle opens gapped-down from the second candlestick of the pattern
Understanding the Evening star patternPsychology behind this candlestick pattern is that the market is experiencing a strong Bullisg trend. First candle of the pattern also follows the same trend and wittnesses strong Buying activity by the bulls.
Second candle opens gapped-up from the previous one which represent the power of Buyers in the start. But later, the prices keep fluctuating in a small range and than close near the open which suggests the condition of indecision i.e. Bulls and Bears are having a hard and equal level of fight.
But from the very beginning of next candlestick, Sellers overpower the Buyers and takes the charge to open gapped-down . Here we can say that from first to third candlestick, there is clean transfer of power from Bulls to the Bears anf thus, the reversal of trend as well.
Favourable or Ideal Evening star patternHere are some charactertsics of evening star pattern that makes its visibility more reliable.
- Longer length of first and third candlestick is more favourable.
- More is the indecision on star candlestick, more are the chances of trend reversal. Therefore, DOJI candlestick is very much favourable appearance in Evening star pattern.
- Gap on both sides of the star are desired.
- Third candle represents the strength of reversal. Therefore, it is expected to have longer body length.
Verifying Evening star patternIf you follow the above article , there is no need for this kind of verification but for knowledge, you can refer the method described below.
When you have some pattern and you think it to be an evening star , you can verify it by directly drawing the pattern on a page and than marking horizontal lines as shown in the figure below at points a,b,c & d.
If the resulatant formed by joining the lines as shown in the figure above, is a shooting star or a Gravestone doji with line from point b to be highest price and from point a to be representing lowest price, than it is an Evening star.
Working with EVENING STAREvening star is somewhat considered to be a reliable pattern, but it always better to use confirmation. When the candle next to the pattern or we can say the fourth candle comes below the lowest point of first candle, you can trade here and trading here means selling as evening star represents a bearish trend to follow .If you dont posses any stock at the moment, you can also earn by doing short selling
Coming to the Stop-loss, you can set it at the peak of the star (at point b).It would always be preferable if the volume is increasing with each candle in evening star.You are suggested to use RSI with Evening star and for more reliability , you can also use price oscillations, trendlines or some other technical indicator.