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What is the Evening Star Candlestick Pattern?

Evening Star Candlestick Patterns help traders identify ideal exit levels in the forex market by signalling a slowed upward momentum and strengthened downward momentum. This pattern occurs very frequently in charts, hence, they are easily identifiable by traders to place exit orders before the market reverses. In this article, we learn all about the Evening Star Candlestick Pattern and how you can trade them.

Understanding the Evening Star Candlestick Pattern

An Evening Star Candlestick Pattern is a technical indicator that consists of three candlesticks that help in identifying bearish market reversals. It appears at the top of an uptrend and provides traders with ideal exit price levels in the market. The Evening Star Pattern consists of three candlesticks

  • A large bullish candlestick that signals a continuous rise in the currency pair prices
  • A smaller bullish candlestick that signals a moderate increase in the currency pair prices
  • A large bearish candlestick that opens below the previous day’s price level and signals a bearish market reversal
Ichimoku-cloud graphic

What is an Evening Doji Star Candlestick Pattern?

The Evening Doji Star Candlestick Pattern is different from the Evening Star Candlestick pattern in only one way. In a Doji Star Candlestick pattern, the second candlestick is not a small-bodied bullish candlestick but a gap candlestick in which the opening and closing price of the currency pair is almost the same. It also appears in an uptrend and reverses after the third bearish candlestick is formed, providing traders with ideal sell/short signals.

Ichimoku-cloud graphic

How to identify the Evening Star Candlestick Pattern for forex trading?

1. Identify a prior uptrend

A prior uptrend can be identified when the current currency pair prices are trading at a higher high and higher low level.

2. Identify the three candlesticks occurring consecutively

The Evening Star Candlestick pattern always consists of three consecutive candlesticks (two bullish and one bearish).

  • The large bullish candlestick will appear as the first candlestick in the pattern, which will be a result of heavy buying pressures from the buyers due to a continued uptrend. Traders at this point will long their trades as no reversal is expected yet.
  • The small bearish candlestick will be the first sign of the currency pair prices opening and closing near to each other, with the trading price range narrowing down. This will be the first sign of a weak uptrend as prices will only increase moderately. This is the first point of market indecision, which is only confirmed after the third candlestick appears.
  • The large bearish candlestick is the first signal of heavy selling pressure that confirms the downtrend reversal in the market. At this point, more and more traders place a sell order to exit the trade.
3. Identify the continued price action

The last step in identifying an Evening Star Candlestick Pattern is the subsequent price action that occurs after the three candlesticks take place in the price chart. Once the prices reverse and traders place exit orders, lower lows and lower highs currency pair prices are observed in the market, signalling traders that from hereon, the market is going to witness a downtrend until there is another market reversal.

How to trade with an Evening Star Candlestick Pattern

Step 1: Set a chart time frame

Set an hourly or weekly chart to identify the three candlesticks in the pattern. This is because a long-term chart is a better depiction of the candlesticks and where the market is supposedly headed, providing you with ideal reversal signals.

Step 2: Analyse the open, close, high and low prices

Pick a particular section in the chart and analyse the currency pair’s open, close, high and low prices during the trading time. The Evening Star Candlestick Pattern can be recognised right where there are two bullish candlesticks, the first one being significantly larger than the second and one bearish candlestick, marking the reversal signal. Once you have studied the different prices properly, you will be in a better position to understand the market momentum.

Step 3: Use the RSI indicator

The Relative Strength Index combined with the Evening Star Candlestick Pattern, helps traders identify overbought levels in the market. These levels confirm traders about the reversal signal and place exit orders accordingly. Wait for the RSI to cross 70 and compare it with where the Evening Star Candlestick Pattern occurs. If they are both occurring simultaneously, the reversal signal is confirmed.

4. Restrict the time frame

Once the overbought area is identified along with the Evening Star Candlestick Pattern on a longer time frame, it is time to now focus on a shorter time frame. You can cut down the time frame to a 5-minute or 15-minute chart as it is neither too slow nor too fast. Restricting the time frame to a shorter level will provide you with the exact price levels where you can place the exit or sell orders.

5. Place stop loss and take profit orders

A stop loss level is the price level at which your trades are automatically exited when the market turns against you. You can either place your stop-loss order right above your entry price or at RSI’s level 30 to limit losses. On the other hand, take profit orders can be placed right below the bearish candlestick or at the opening level of the candlestick that occurs as a downtrend begins.

6. Monitor and exit trades accordingly

After you have identified the Evening Star Candlestick Pattern, compared it with the RSI levels and placed the stop loss and take profit orders, it is time for you to sit back and monitor the price chart closely. Look for the uptrends and reversals to ensure that you exit trades on time.

Trade with the Evening Star Candlestick Pattern

It is important for traders to know when the market is going to potentially reverse as it helps them take important trading decisions accordingly. You can start trading with Blueberry Markets to enjoy a seamless trading experience and make the most out of the Evening Star Candlestick Pattern.

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