How to Trade the Morning Star Candlestick Pattern

When it comes to technical Analysis, chart patterns help you understand the market better. Among such patterns is the Morning Star Candlestick Pattern, which is a trend reversal. Recognized for its reliability, the three-candle formation offers higher accuracy and can be a powerful tool for understanding the trend and making informed decisions accordingly.

In this article, we will begin by defining the Morning Star pattern, its structure, and the psychology behind it, followed by how to trade it with a strategy, with its example, along with the key characteristics, and its advantages and disadvantages.

What is the Morning Star Pattern?

The name ‘Morning Star’ refers to the start of the ‘day’ (or bull market) and the end of the night. The Morning Star candlestick pattern identifies the potential bullish reversal in a downtrend. This pattern specifically signals the start of an uptrend and the end of a downtrend.

These patterns suggest that the sellers are losing control and the buyers are taking over the trend. Which would result in a bullish trending market.

Structure:

It is mainly a bullish reversal pattern that is spotted at the bottom of a price chart. It consists of three candles.

First Candle: It is a large bearish candle, displaying a strong selling pressure of the security and a continuation of a downtrend.
Second Candle: It is a smaller-bodied candle that can be bullish or bearish, indicating market indecision. The smaller candle suggests a weakening of selling pressure.
Third candle: It is a large bullish candle, with a high possibility of the trend reversal, and it is the confirmation of the change in direction.

The Morning Star candlestick pattern psychology

Bearish Candlestick: In the current downtrend, the sellers are dominant, driving the price to its low, indicating further downward movement.

Small Indecision candlestick: At the bottom, a small-bodied indecision candlestick(either bearish or bullish) is formed. The buyers see an opportunity and step in to push the price up. Initially, sellers resist the buyer movement by matching the buyer’s strength, signaling market indecision.

Buyers push up and Trend Reversal: After the closing of the second candlestick, buyers step in aggressively, driving the price higher again and indicating a strong uptrend ahead, resulting in a strong bullish candlestick, and confirming the trend reversal from a downtrend to an uptrend.

How to trade the Morning Star Pattern?

After spotting the morning star pattern, wait for the confirmation.

Entry

As the third candlestick closes above the high of the second candlestick, enter a long position in the trade.

Stop-loss

Stoploss can be placed at the low of the pattern formed.

Target

Traders can place a target at the nearest resistance level after the entry or based on their risk-reward ratio.

If there is any candlestick signaling a reversal of the trend. You plan for an exit.

Example: In the image below, you can look at the chart of “RIL Ltd” stock at a 4-hour timeframe on 13th and 14th July 2022. You can see the buy signal generated by the Morning Star candlestick as it is a trend reversal.

What are the Key Characteristics?

The Context on Trend: For a bullish reversal, the pattern should form at the bottom of a downtrend to provide a strong upward directional move.

Volume indication and Confirmation: After the formation of the third bullish candlestick, there is a rapid increase in the volume. As traders often look for additional confirmation to minimize their risk in the trade, such as a higher close of the fourth candlestick or a break above a resistance level, displaying confirmation of the uptrend and adding strength to the potential reversal.

What are the advantages of the Morning Star candlestick Pattern?

The candlestick is Easy to spot and easy to identify the clear entry and exit points.
The candlestick pattern displays the strength of buyers taking over the trend, and gives you a clear understanding of the price action.
It is versatile across all timeframes and easy for beginners to spot and trade.

What are the disadvantages of the Morning Star candlestick Pattern?

Morning Star candlestick tells you a reversal may be coming, but it doesn’t indicate how strong the reversal will be or the target.
The middle candle’s varying size and shape can lead to diverse judgments among traders.
The morning star candlestick on its own is not strong enough to signal the trend reversal.

In Closing

In this article, we came across what the morning star candlestick pattern is, how to trade it with an example, and the key characteristics, along with the advantages and disadvantages of it.

The Morning Star Candlestick Pattern adapts quickly to the price action, giving you a better understanding of the potential bullish reversals from a downtrend to an uptrend, and it is easy to spot and trade. They indicate multiple opportunities for clear entry and exit signals, making it a more efficient and accessible tool for beginners.
In any financial market across the world, no indicator or tool is 100% accurate. When it is combined with additional indicators or tools, the efficiency and accuracy are high, and with proper risk management, discipline can pave the path to profitability.