What is Morning Star Indicator?

The Morning Star Indicator helps identify strong trend reversals in the forex market and enables you to take trade position entry decisions accordingly. It sends a price reversal signal by starting from a downward trend which is followed by an upward climb in the market. In this article, we take a look at everything you need to know about the Morning Star Indicator to power up forex trading.

 

Understanding Morning Star Indicator

The Morning Star Indicator signals trend reversals in the forex market. It is also called a positive indicator as it signals the start of an uptrend. The Morning Star Indicator consists of three bullish candlesticks that form first with a downtrend followed by an uptrend. It signals price reversal from the previous price pattern and confirms traders the ideal entry points in the market.

• The first candlestick is a tall black or red-coloured one, which initiates the Morning Star pattern.
• The second candlestick is a smaller candlestick that has a short body but long wicks, which captures the market indecision moment where the bearish market starts becoming a bullish one
• The third candle is the tallest amongst all the three, and it confirms the price reversal that marks a new market uptrend, signalling traders to enter the market at this point

How to identify a Morning Star Pattern?

The Morning Star pattern starts with a comparatively bigger sized bearish candle, followed by a smaller red-coloured candle that is only slightly bearish. The third and last candle in this pattern is more significant than the previous two candles in size, and identifying these three main candles forming is only the first step towards identifying the whole pattern. The other steps into identifying the pattern are -

• Identify the part where the market is showing lower lows and lower highs in an existing downtrend.
• Identify a large bearish candle that appears due to heavy selling pressure in the market and continues the existing downtrend. At this point, traders are signalled to short the trades.
• The next step is to identify a smaller bearish or bullish candle that indicates the first downtrend signal. This candle makes a lower low in the market and showcase market indecisions.
• The third step is to identify the largest bullish candle in the pattern, which indicates the first true reversal sign with buying pressures in the market. This candle gaps up from the previous close price and starts a new uptrend
• After the third candle is identified, an uptrend is confirmed, and traders notice higher lows and higher highs that signal them to place long orders.

*This is an example only to enhance a consumer's understanding of the strategy being described above and is not to be taken as Blueberry providing personal advice.

What are the top Morning Star trading strategies

 

Relative Strength Index

Relative Strength Index helps traders measure price fluctuation in overbought and oversold market situations. Combining it with the Morning Star Indicator, traders are given ideal entry points when the market is at its lowest, to profit from the uptrend. To trade with the Morning Star RSI strategy, we use 5-periods RSI and enter buy positions as soon as the RSI crosses level 30, as a Morning Star forms. This is because reading over 30 indicates the market correcting itself from an oversold situation to a normalized uptrend that encourages traders to open long positions.

Morning Star Doji

A Doji candlestick pattern indicates market indecision where the closing and buying prices of the currency pair are almost the same. Right after the indecision takes place, a bullish move is expected due to a possible trend reversal, and traders stop selling to take more long positions in the market instead. The next candle opens at the same level as the previous Doji candle but confirms a bullish trend reversal since the market then witnesses an uptrend thereafter.

How to trade with the Morning Star Indicator?

Since the Morning Star Indicator suggests that bulls are taking over the market and bears are losing their grip, leading to a bullish trend reversal, it is always advisable to trade this indicator with other price patterns like trend lines or support and resistance levels. Here is how you can trade with the Morning Star Indicator in 3 easy steps –

1. Downtrend confirmation

Confirm the downtrend with the help of support levels that indicate prices cannot fall further and will reverse from hereon. This helps confirm a continued downtrend that reverses so traders can take buying positions in the market. The downtrend can be confirmed on the existing timeframe by measuring the support level. The formula of calculating the support levels – First level of Support = (2*PP) – high, where PP = Pivot Point = (High price + Low price + Close price) / 3 Second level of Support = PP – (High – Low) Third level of Support = Low – 2(High – PP) The downtrend is confirmed as soon as the Morning Star Indicator reaches these support levels.

 

2. Identifying the Morning Star pattern

A Low Stochastic occurs when the currency pair prices close near its low price and keep decreasing. An oversold condition is signalled when the stochastic lines are below 20, providing traders with an upward market reversal. This prepares traders to enter long trade positions, with the prices expected to increase soon.

 

3. Taking entry, stop loss, and take profit positions

The suitable entry point with this indicator is the closing point of the green candle that appears immediately after the three red candles. You can exit the position at any area of resistance. The stop-loss order can be placed at the currency pair price reaching close to the resistance level in a higher timeframe. The take profit price can be set at a level where the currency pair prices touch the old support level in the pattern.

*This is an example only to enhance a consumer's understanding of the strategy being described above and is not to be taken as Blueberry providing personal advice.

Benefits of the morning star pattern

Reversal signal

The morning star candlestick pattern is a widely recognized bullish or upward reversal pattern. It signals a potential shift from a downtrend to an uptrend reversal, making it a useful tool for forex traders. When this pattern forms, it suggests that market sentiment may be turning positive, indicating a potential long opportunity.

Suggests price action

The morning star candlestick pattern is characterized by a significant price movement. The large, downward trend candle and the subsequent upward gap signal a substantial shift in market momentum. This strong price action can lead to significant gains for traders who identify and capitalize on the trend reversal.

Clear confirmation

The upward trend candle that follows the indecisive candle provides a clear confirmation of the trend reversal. This confirmation increases the confidence in the potential uptrend, making the market more likely to continue to move higher.

Multiple timeframes

The morning star candlestick pattern can be used on various timeframes, from intraday to weekly price charts. This allows traders to identify potential downtrend reversals or upward reversals at different time scales and adapt their trading strategies accordingly. The pattern can be effective in different market conditions, including ranging markets and trending markets.

Versatile

The morning star candlestick pattern can be used in different market conditions (ranging and trending) and with various trading strategies. It can be combined with other candlestick patterns, technical indicators and technical analysis to increase the accuracy of trading decisions. Additionally, traders can use the pattern to identify potential entry points, set stop-loss levels, and determine gain targets.

Limitations of the morning star pattern

False signals

The morning star candlestick pattern can sometimes produce false signals, leading to incorrect trading decisions. To increase accuracy, this pattern must be used in conjunction with other technical indicators and technical analysis.

Confirmation required 

The morning star candlestick pattern alone may not confirm a reversal. It's recommended to wait for additional confirmation, such as a breakout above the high of the downward trend candle or a positive divergence between the price and a technical indicator.

The morning star candlestick pattern alone may not confirm a reversal. It's recommended to wait for additional confirmation, such as a breakout above the high of the downward trend candle or a positive divergence between the price and a technical indicator.

Market conditions

The reliability of the morning star candlestick pattern can vary depending on market conditions. It may be less reliable in choppy or sideways markets.

Timeframe dependence

The pattern may be more effective on certain timeframes than others. It's important to experiment with different timeframes to find the most suitable one for the trading strategy.

Individual interpretation

The interpretation of the morning star candlestick pattern can vary among traders. Some traders may have different criteria for identifying the pattern or determining its significance, hampering its validity in an overall market condition. 

Morning star vs doji morning star

Candlestick formation

The morning star candlestick pattern is a small, indecisive candlestick of any color. Meanwhile, the Doji morning star patterns are characterized by a small candlestick body and long shadows.

Reversal strength

A morning star pattern often indicates a stronger reversal due to the upward gap in the third candle. On the other hand, the Doji morning star patterns may signal a slightly weaker reversal due to the indecision represented by the Doji candle.

Confirmation

The morning star candlestick pattern is confirmed with the gap up in the third candle, which strongly confirms the reversal. While the Doji candle still indicates a potential reversal, it may require additional confirmation, such as a breakout above the high of the downward trend candle.

Trading implications

The morning star candlestick pattern may offer stronger trading opportunities due to the potential for significant price movement. Meanwhile, Doji morning star patterns are a more cautious signal, requiring additional technical analysis before entering a trade.

Morning star vs. evening star

Direction

Morning star patterns are bullish reversal patterns, indicating a potential uptrend after a downtrend. On the other hand, the evening star patterns are bearish reversal patterns, indicating a potential downtrend after an uptrend.

Candlestick formation

The morning star candlestick pattern consists of three candle patterns: a large downward-trending candle, a small indecisive candle, and a large upward-trending green candle. The evening star patterns also consist of three candle patterns, but it has a large upward-trending green candle, a small indecisive candle, and a large downward-trending candle.

Gap

The morning star pattern has a third candle that gaps from the indecisive candle. The evening star patterns have the third candle, which gaps down from the indecisive candle.

Trading implications

The morning star pattern signals a potential long opportunity, whereas the evening star patterns signal a potential short opportunity or selling pressure.

Common mistakes to avoid when trading the morning star pattern

• Overreliance on the pattern: The morning star pattern alone may not be sufficient to confirm a reversal. Look for additional indicators or price action signals to strengthen your trading decision. Traders should also consider the broader market context and any relevant news or events that could influence the price movement.
• Ignoring false signals: The morning star pattern can sometimes produce false breakouts. Be cautious and wait for a clear reversal confirmation before entering a trade. Avoid getting caught up in short-term fluctuations that may mimic the morning star pattern but lack the underlying strength of a true reversal.
• Poor risk management: Always use a stop-loss order to limit potential losses. Place it below the low of the second, indecisive candle. Traders should also avoid risking too much of their trading capital on a single trade. Proper position sizing is crucial for long-term trading.
• Ignoring timeframe considerations: The morning star pattern can be effective on different timeframes. Experiment to find the timeframe that suits the trading style and market preferences. Traders can consider using higher timeframes for more significant reversals and longer-term trends.
• Overtrading: Avoid overtrading by waiting for high-quality setups and sticking to the trading plan. Traders should also avoid letting emotions cloud their judgment. Stick to the strategy and avoid impulsive decisions.
• Relying solely on past performance: Past performance does not indicate future results. Market conditions can change rapidly, and what worked in the past may not work in the present. Be prepared to adapt your trading strategy to changing market conditions.

Trade with the Morning Star Indicator to identify market trend reversals

The Morning Star Indicator is a strong upward trend reversal signal that helps traders place buy orders for successful trade entries. Ready to use Morning Star to profit from your forex trades? Sign up for a live trading account or try a demo account on Blueberry.