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
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.
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 risk-free demo account on Blueberry Markets.
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