Watch our video on how to identify and trade evening star patterns.
What Is an Evening Star Pattern & How to Identify These Patterns?
- An evening star pattern consists of three candlesticks that form near resistance levels. The 1st candle is bullish, the 2nd is a spinning top or doji, and the 3rd is a bearish candlestick. Typically, the 3rd candle forms a bearish reversal pattern.
Evening star patterns are three candlesticks patterns found on stock charts. The evening star pattern is a bearish reversal pattern. Evening stars are a top reversal pattern for traders. When this pattern forms it can be seen as a sign of bad things on the horizon. Watch our video above to learn more about evening stars.
The push and the pull of buyers and sellers allow these patterns to develop. Without the tug of war between bulls and bears we wouldn't have trading.
Legendary rice trader Homma realized that there was a correlation between emotion and price movement in rice trading. He developed a way to track that. Hence the Japanese candlesticks patterns we use today.
Candlesticks allow us to see the emotions of traders regarding a stock. Candlesticks in turn form patterns. These patterns are how traders know what to trade and when to trade. Take our candlestick reversal patterns course.
1. Basics of Evening Star Patterns
Evening star patterns are made up of three candlesticks The evening star has a long bullish candlestick. This signifies that the bulls are in control.
Next comes a smaller candle that could be bullish or bearish. It's typically a doji candle. Buyers and sellers had equal control that day. Hence the indecision mode. It should close higher than the previous candle. Read our post on doji candlesticks to learn more.
The last candlestick is then a long bearish one. It should open near the middle of the second candle and close near the middle of the first candlestick in the pattern. The bears have now taken full control.
As you know by now, no pattern is ever perfect. While that may be the formation, it may not always look exactly like that. The best thing you can do is know what every pattern means so as not to get caught up in the exact formation. Getting confirmation of the move is important also. Technical analysis basics are good to know to confirm moves such as a reversal or continuation (bookmark our penny stocks list and stock watch lists pages, which are updated daily).
2. Technicals of Evening Star Patterns
Candlesticks are the first line of defense in technical analysis. Without candlesticks the indicators such as moving average lines as well as RSI wouldn't mean anything. You need the knowledge that candlesticks provide.
Not only the gauge of traders emotions but also the other factors they provide. The real bodies and wicks form key support and resistance levels. Traders are incredibly aware of those levels. Read our post on how to draw support and resistance.
Moving average lines also provide those levels. If you've traded for any period of time, you'll notice how stocks will trade around moving averages. If they move away from them, the candlesticks always come back to them.
In the chart for APA shown above, you can see that the second candle tried to break the 50 SMA and could not. So price fell below it. Read our post on the simple moving average formula.
Evening star patterns may be top reversal patterns but they can be hard to spot. Hence the need for confirmation before jumping into a trade (book mark our stocks lists page which is updated daily).
3. Patterns Within Large Patterns
Candlesticks group together to form patterns. Those patterns can be large like symmetrical triangle patterns. They can form inverse head and shoulders patterns or go even smaller like the evening star candlesticks pattern.
It's so important to be able to see patterns within patterns. Bullish and bearish patterns form within each other all the time. That can be the difference between a breakout or a breakdown.
Traders are constantly looking for patterns to trade. Those patterns give you a direction. This allows you to make good trades. You wouldn't want to short a stock at the breakout of an inverse head and shoulders.
Sometimes the small patterns can form right before that breakout occurs and not being able to see that can hurt. Hence why you're always hearing us say to find patterns within patterns.
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How to Trade Evening Star Patterns
- How to trade evening star patterns:
- Watch for 1st bullish candlestick to form
- Next, watch for 2nd smaller spinning top or doji candlestick to form
- Then, watch for 3rd bearish candlestick to fall below the 2nd
- Traders take a short position once price breaks below the 3rd candlestick
- Place stop above the 3rd candle
- Some traders take a long position once price breaks above 3rd candle
- Then place stop below the 3rd candle
Evening star patterns are bearish reversal patterns. One of the best steps you can follow is to get confirmation of the move before placing an order. Just because the pattern forms, doesn't mean it will reverse.
Look at the patterns big and small as well as technical indicators. Make sure you practice in a paper trading account before using real money. This way you know how you want to trade and have practiced at it.