The Morning Star Pattern 

What is the Morning Star Pattern? 

It is a pattern that appears on the chart as three distinct candles at the bottom of a downtrend, indicating a potential reversal of the trend from bearish to bullish. Its appearance suggests that the dominance of the Bears (sellers) has ended, and the Bulls (buyers) have begun to enter the market. 

How to Identify the Morning Star Pattern, and What is its Importance? 

The pattern consists of three candles: 

The First Candle (The Night Candle): Appears as a long, red, bearish candle, reflecting strong and sustained control by the Bears (sellers). 

The Second Candle (The Star): Follows as a smaller candle, which may be bearish or bullish, creating a price gap. This candle indicates that the market is pausing to catch its breath or reflects a state of hesitation and uncertainty between the Bears and Bulls. 

The Third Candle (The Morning Candle): Forms last and is a long, bullish candle, closing significantly above the midpoint of the Night Candle (the first candle), confirming the strong entry of the Bulls (buyers) and the start of the bullish reversal. 

The importance of this pattern lies in its indication of a shift in control from the Bears (sellers) to the Bulls (buyers). It is a strong signal of a potential price increase, representing a possible buying opportunity for traders. 

How to Trade the Morning Star Pattern? 

Traders rely on the pattern’s signal, which indicates a potential bullish reversal after a downtrend. The reliability of this signal increases when the pattern appears at a key support level. Traders use other technical indicators to confirm the pattern’s signal, such as momentum indicators like the RSI or MACD. 

Determining the Entry Point 

After confirming the pattern by its appearance at a clear support level, traders look for further confirmation via momentum indicators to solidify the bullish signal and enter the trade: 

RSI: Helps in revealing oversold conditions. 

MACD: A bullish crossover of the MACD lines. 

Divergence: A bullish divergence in either of the two indicators. 

Immediate Entry: The close of the pattern’s third candle (as an immediate entry signal). 

Stop Loss 

In this pattern, the stop loss order can be placed in two locations: 

You can place the stop loss below the lowest low formed by the pattern (Swing Low). 

Alternatively, you can place it below the lower boundary of the support level where the pattern formed. 

Take Profit 

This pattern also offers more than one way to take profits: 

Take profit can be set at a predetermined risk-to-reward ratio, such as 2:1 or 3:1 (i.e., risking one dollar to earn two or three dollars). 

Remember: Continuously monitor your position and adjust your stop-loss and take-profit levels as needed, based on changing market conditions. 

Morning Star vs. Morning Star Doji 

The difference between these two patterns lies in the middle candle (The Star): 

In the Morning Star pattern, the middle candle has a relatively thick body (whether red or green). 

In the Morning Star Doji pattern, the middle candle’s body resembles a plus sign (+) or a T, and its body is almost flat. 

The Doji candle reflects market indecision and uncertainty much more clearly and strongly than the thick-bodied middle candle of the regular Morning Star. 

Morning Star vs. Evening Star 

The Evening Star pattern is the exact opposite of the Morning Star pattern. 

While the Morning Star represents the end of the night and the beginning of an uptrend, the Evening Star predicts the end of the uptrend and the beginning of a downtrend. 

Feature	Morning Star	Evening Star
Location	At the bottom of a downtrend.	At the peak of an uptrend.
Signal	Bullish reversal (Buy)	Bearish reversal (Sell)
First Candle	Long red (bearish) candle	Long green (bullish) candle
Third Candle	Long green (bullish) candle	Long red (bearish) candle
Shift in Control	From Bears (sellers) to Bulls	From Bulls (buyers) to Bears

Limitations of the Morning Star Pattern 

Relying only on the visual pattern is risky, as it is easy to mistakenly see a “Morning Star” in any downtrend, even if the signal is not genuine. 

The pattern is most effective when combined and confirmed by other technical indicators such as the MACD and RSI. 

Other factors can be sought to confirm the pattern, such as increased trading volume (which confirms the strength of the reversal) or the pattern’s formation at a key support level. 

In nutshell 

Although the Morning Star pattern is useful for identifying potential trading opportunities, like other technical analysis patterns, it should not be relied upon solely when making trading decisions. It must be combined with other technical indicators to mitigate risk and minimize potential losses. 

You can take advantage of our educational and analytical resources to learn about the technical analysis tools used in trading. You can also start with a free demo account from Naqdi, which allows you to learn and build a profitable trading strategy before risking real money. Open your demo account now!