Can the Evening Star Candlestick Pattern Predict Market Reversals?

TLDR (Too Long Didn’t Read):

The Evening Star Candlestick Pattern is a bearish reversal pattern that typically appears at the end of an uptrend, signaling a potential shift in the market’s direction from bullish to bearish. It is composed of three candles: a large green candle, a small candle that gaps above it, and a large red candle that closes below the midpoint of the first candle.

What is the Evening Star Candlestick Pattern?

Pattern	Evening Star Candlestick
Type	Bearish reversal
Occurrence	End of uptrend
Candles	Green, small, red
Meaning	Buyers lose, sellers win
Confirmation	Other indicators and trading plan
Components	A large green candle, a small candle that gaps above it, and a large red candle that closes below the midpoint of the first candle
Psychology	A shift in market sentiment from bullish to bearish, indicating a loss of momentum, a state of indecision, and a surge of selling pressure
Trading Strategy	Place a stop-loss above the high of the second candle and exit when the price reaches a demand zone or finding a low area using other price action clues.

The Evening Star Candlestick Pattern is a clear sign of a bearish reversal and a potential change in the market sentiment. It suggests that the uptrend is exhausted and the sellers are ready to take over. Traders who spot this pattern should be cautious and consider exiting their long positions or entering short positions. The pattern consists of three candles that form a striking contrast.

Rules of Recognition:

They form at the end of an uptrend.

This formation has three candlesticks.

The first candle is a large green candle that shows a strong bullish momentum. The price closes near the high of the day, indicating that buyers are confident and aggressive.

The second candle is a small candle that gaps above the first candle. It can be either green or red, but the color is not important. The main point is that the price movement is limited and the candle body is small. This shows that the upward trend is losing steam and the buyers are becoming hesitant.

The third candle is a large red candle that closes well below the midpoint of the first candle. It reveals a sudden surge of selling pressure that overwhelms the buyers. The price closes near the low of the day, indicating that sellers are dominant and pessimistic.

Quality Elements of the Evening Star Candlestick Pattern

The potency of the Evening Star pattern is heightened by several quality elements:

• The Gap: If the 2nd candle in the middle creates a noticeable gap between the 1st and 3rd candles, the formation reinforces the pattern’s reliability.
• Third Candle’s Penetration: The deeper the third candle penetrates the first candle’s body, the stronger the reversal signal.
• Volume: Higher trading volume during the formation of the pattern, especially on the third candle, indicates stronger market participation and reinforces the pattern’s validity.

The Importance of a Gap in the Evening Star Pattern

The Evening Star Pattern is more convincing when there is a gap between the first and second candles. A gap means that the price opens higher or lower than the previous close, indicating a strong momentum in the direction of the gap. A gap doesn’t have to be present for the pattern to be valid, but it does increase its reliability.

How does the gap affect the Pattern?

The second candle, which is a small white candle, should have a gap with the candles on both sides. This creates a more striking contrast and shows that the buyers are losing their edge.

The third candle, which is a large black candle, should also have a gap with the second candle. This shows that the sellers are taking over and pushing the price down. The pattern can still work without these gaps, but they make it more ideal.

Evening Star vs. Evening Doji Star

The Evening Star and the Evening Doji Star are both reversal patterns that appear at the end of an uptrend. They indicate that the buyers are losing their grip and the sellers are taking over. However, there is a subtle difference between them that makes the Evening Doji Star more reliable and powerful.

• The Evening Star consists of three candles: a large green candle, a small candle that gaps above it, and a large red candle that closes below the midpoint of the first candle.
  
  
• The Evening Doji Star is similar, but the second candle is a Doji, which means that the opening and closing prices are almost the same. This shows that the market is in a state of confusion and uncertainty.

The Doji adds more weight to the reversal signal, as it reflects a higher level of indecision and a possible change in the market sentiment. The Doji Star is also known as the Southern Cross, because it resembles the constellation of the same name. The psychology behind these patterns is the same as the regular Evening Star, but the Doji Star is more shocking and significant.

Evening Star vs. Engulfing Pattern

An Evening Star and a Bearish Engulfing are reversal patterns on price charts. They show a possible change from up to down. They have opposite candles that cover each other.

An Evening Star has three candles: a green, a small, and a red. It happens at the end of an uptrend. The second candle gaps up and the third candle closes into the first.

A Bearish Engulfing has two candles: a small and a red. The red candle covers the small candle. It can happen anytime. It does not need a gap up or a close into the first. The difference is that an Evening Star has three candles and a Bearish Engulfing has two.

An Evening Star is always at the end of an uptrend and a Bearish Engulfing can be anywhere.

The similarity is that they both show a reversal from up to down. They both have a small candle and a big candle that cover each other. They both need the next candle to confirm the reversal.

Every Evening Star is a Bearish Engulfing, but not every Bearish Engulfing is an Evening Star. An Evening Star is a special Bearish Engulfing that has more rules. The rising candle before the Bearish Engulfing in the Evening Star is important because it shows the top of the uptrend and the gap up.

How to trade the Evening Star Pattern?

Entry Point :

To make the example simpler, I used black and white colors for the candles. Black represents red, and white represents green. In this example, we can observe an uptrend. At the peak of the uptrend, we can spot a three-candle pattern.

The first candle is white and has a long body. The second candle has a very small body. The third candle is as long as the first one and has a bearish black color. Here is our evening star shining brightly. This is our harbinger of the fall.

Through this example, I want to show the entry-stop and tp models.

To enter the trade when the pattern appears: Look for the 3rd red candle with a long body that is at least half the size of the first candle. Enter the short poisiton as soon as this candle closes. This trade gave us a profit of 4.4R and that is a nice ratio.

To enter the trade with more confirmation: Wait for another red candle that follows the same trend after the pattern. Confirm the pattern with the completion of the third candle. Consider entering a short position after the pattern is confirmed. This is an additional confirmation. This entry is good for traders who prefer more assurance. This trade leaves us a profit of 2.4R, which is less profitable but safer than the other one.

Stop-loss (SL) :

This pattern is a bearish reversal signal that requires careful risk management. Here are some tips on how to set your stop-loss and exit points:

The stop-loss should be placed just above the high of the second candle, which is the small candle in the middle of the pattern. This protects you from a possible continuation of the uptrend.

If you want an even safer stop point, it can be placed above the previous swing high. Swing Highs and Swing Lows will teach you more about swing points.

Take Profit (TP) :

The exit point, or the point to take profits, depends on how the price behaves after the pattern. You can use different methods to determine your exit point, such as:

• Setting a target based on a support level that the price is likely to reach.
• Using a trailing stop that follows the price as it moves down and locks in profits when the price reverses.
• Exiting when the price breaks a lower high level that indicates a change in the trend direction. To learn what Lower High means, read the detailed guide on Higher Highs and Lower Lows.

Profitable Examples of the Evening Star Pattern:

The first example shows the evening star pattern we look for after an uptrend. I notice something interesting here. We would not trade if we only waited for a bearish engulfing at the peak, because the highest and the lowest candles are both black. But in a bearish engulfing, the small candle should be white and the big candle should be black.

What does this tell us? Engulfing is a useful concept and I apply it often, but knowing all the concepts will make it easier to spot opportunities.

Now let’s move on to another example.

The second example shows an evening star pattern with an engulfing pattern. This is a strong reversal signal. It makes us more sure about the trade. We can use previous swing lows as targets.

The third example shows the Evening Doji Star. As you can see, the price dropped even more after the TP point. This is a very rewarding trade. When you spot a clear candle pattern like this, trading at the right entry points will boost your confidence and make your trading journal green. I recommend you practice a lot until you recognize this pattern easily.

Top 6 Tips for Trading the Evening Star Pattern:

1. The Evening Star is a candle formation containing 3 bars.
2. The color of the middle candle is unimportant. It can be red or green (black or white).
3. This pattern means the price may drop soon and tall red candles are better.
4. The Evening Star is a rare pattern but it is considered by traders to be a strong indicator of future price declines. It is often used in conjunction with other price action concepts to confirm the reversal.
5. The Evening Star can be used to enter a short trade or exit a long trade. The stop loss can be placed above the high of the pattern or the previous swing high. The profit target can be based on the previous demand/support level or the measured move of the pattern.
6. The Evening Star can also be a Doji Evening Star, which means the second candle is a doji, a candle with no or very small body. A doji shows more indecision and uncertainty in the market, which makes the reversal signal stronger.

Common Misconceptions When Trading with Evening Star Pattern:

• The Evening Star pattern always guarantees a reversal.
  
  Correction: It is a signal, not a guarantee. It shows that the uptrend is losing momentum and may change direction, but it needs confirmation from the next bar.
  
• The Evening Star pattern has to be perfect.
  
  Correction: It does not have to be perfect. It can have different shapes and sizes, but the main idea is the same. The second candle should be smaller than the first and third candles, and the last bar should close below the midpoint of the first candle.
  
• The Evening Star pattern can appear in any time frame.
  
  Correction: This pattern can appear in any time frame, but it is more reliable in higher time frames, such as 4-hours, daily or weekly charts. The longer the time frame, the more significant the reversal signal.
  
• The Evening Star pattern is the same as the Shooting Star pattern.
  
  Correction: The pattern is not the same as the Shooting Star pattern. The Shooting Star is a single-candle pattern that has a long upper wick and a small body near the low. The Shooting Star pattern does not require a gap up or a close into the first candle, unlike the Evening Star pattern. The Shooting Star pattern can also appear in a downtrend, while the Evening Star pattern only appears in an uptrend.
  
• The Evening Star pattern is always followed by a sharp decline.
  
  Correction: It is not always followed by a sharp decline. Sometimes, the price may consolidate or retest the high before moving lower. Traders should be patient and use stop losses to protect their positions.
  
• The Evening Star pattern is the only pattern to look for.
  
  Correction: The pattern is not the only pattern to look for. There are many other candlestick patterns that can signal reversals, such as Engulfing Pattern, Railroad Track Pattern, Inside Bar or Outside Bar Strategy. Traders should learn to recognize and use them in combination with the Evening Star.

Psychology and Scenario Behind the Evening Star Pattern

The psychology underlying that is rooted in a shift in market sentiment from bullish to bearish. Here’s the typical scenario:

Bullish Confidence: The large bullish candle in the beginning demonstrates strong buying interest, indicating that bulls are in control.

Uncertainty Emerges: The small candle that follows shows a decrease in momentum. This could be due to bulls taking profits or bears starting to test the market, introducing uncertainty.

Bearish Takeover: The final large bearish candle suggests a significant increase in selling pressure. This indicates that the bears have overtaken the bulls, potentially leading to a trend reversal.

This pattern reflects a change in investor psychology from a bullish outlook to a bearish outlook, often triggered by changing fundamentals, market news, or reaching overbought conditions.

Traders often use this pattern in conjunction with other technical indicators to confirm the reversal and to determine the optimal entry and exit points.

Conclusion

The Evening Star Candlestick Pattern is a great way to spot when the market is changing from bullish to bearish. It shows you how the buyers and sellers are feeling and what they are doing. You can use this pattern to make smart trading choices, but you should also use other tools and strategies to confirm the reversal and to control your risk. Remember, no pattern is perfect. It is just one of the many candlestick patterns that can help you understand the market better.

FAQs:

What are the limitations of using Evening Star patterns?

🔐It may not work in all market conditions, especially in highly volatile markets.
🔐It may be a false signal, leading to losses if the market does not reverse as expected.
🔐It should be used with other analytical tools and risk management strategies.

Is an evening star bullish or bearish?

It indicates a bearish trend, while the Morning Star Candlestick pattern represents its bullish counterpart.

What is the difference between an Evening Star and a Doji Evening Star?

Both are bearish reversal patterns with three candles. The difference is the second candle of a Doji Evening Star is a doji, which shows more indecision and uncertainty.

How do you identify an Evening Star pattern on a chart?

This pattern is a bearish reversal pattern with three candles: a large green, a small, and a large red. It appears at the top of an uptrend and shows a shift from optimism to caution. The second candle gaps up from the first and the third candle closes into the first.

Is an evening star a reversal pattern?

Yes, it is a reversal pattern on price charts. It shows up at the end of an uptrend and means prices might go down. It is rare but trustworthy for technical analysis.

How are an Evening Star and a Bearish Engulfing different and similar?

They are both reversal patterns that show a possible change from up to down. They have opposite candles that cover each other. The difference is that an Evening Star has three candles and a gap up, while a Bearish Engulfing has two candles and no gap. The similarity is that they both need the next candle to confirm the reversal.

Is this the most profitable pattern among all chart patterns?

The profitability of this pattern depends on your risk management. There is no clear answer to which pattern is the best. You should learn more about trade management and how to control your risk. This pattern is simple and useful, but you need to use it wisely.