What Is an Evening Star?
An evening star is a stock price chart pattern that’s used by technical analysts to detect when a trend is about to reverse. It’s a bearish candlestick pattern that consists of three candles: a large white candlestick, a small-bodied candle, and a red candle.
Evening star patterns are associated with the top of a price uptrend, signifying that the uptrend is nearing its end. The opposite of the evening star is the morning star pattern, which is viewed as a bullish indicator.
Key Takeaways
- Price Reversal Prediction: An evening star is a reliable indication of future price declines.
- Strong Bearish Indicator: Although rare, it’s highly regarded among traders for its accuracy.
- Opposite of Morning Star: The ascending counterpart to this pattern is known as the morning star.
- Three-Part Pattern: This pattern involves a specific formation of one large white candlestick, followed by a smaller one, and concludes with a large red candlestick.
How an Evening Star Works
A candlestick pattern represents the open, high, low, and close price for a stock over a period of time.
Each candlestick consists of a candle and two wicks. The length of the candle depicts the range between the highest and lowest price of the session. A long candle indicates a significant change in price, while a short candle shows minimal price movement. Long candlestick bodies indicate intense buying or selling pressure, depending on the trend direction. Short candlesticks indicate little price movement.
The evening star pattern unfolds across three days:
- Day One: A large white candle signifying continued rise in prices.
- Day Two: A smaller candle representing a modest price increase.
- Day Three: A significant red candle that opens below the previous day’s close and closes near the midpoint of the first day.
Special Considerations
Although the evening star is a reliable indicator of a downward trend, its formation can be obscured by market noise. Traders often use additional tools like price oscillators and trendlines to confirm the pattern’s occurrence. It’s prudent to use various technical indicators rather than relying exclusively on one. Other bearish candlestick patterns include dark cloud cover and the bearish engulfing pattern.
Example of an Evening Star Pattern
The following chart illustrates the evening star pattern:
Within these three days, a long white candle signifies a rise from significant buying pressure. The second day features a more modest price increment. On the third day, a long red candle showcases selling pressure that drives the price mid-way into the first day’s range.
These markings confirm the evening star pattern. Traders interpreting this pattern might consider selling or shorting the security in anticipation of an impending decline.
Clarifying the Open, High, Low, and Close Prices
These metrics reflect the value of a stock throughout the trading day. ‘Open’ is the initial price when markets start, ‘close’ represents the last price of the session, while ‘high’ and ’low’ encapsulate the day’s price variation.
Evening Star Pattern in Practice
This pattern uses the aforementioned price points over three days and is a strong signal amidst prevailing market trends.
What Is the Doji Candlestick Pattern?
A doji pattern reflects negligible price movement within a trading session, forming when the open and close prices are nearly identical. Upward movement may foreshadow a decline, while downward movement could indicate an uptrend.
The Bottom Line
Diversifying indicators helps in predicting price movements, and the evening star pattern is a solid signal for identifying downward trends. While it can be challenging to identify due to market noise, using tools like trendlines and oscillators along with professional advice can enhance your trading strategy.
Related Terms: technical analysis, candlestick chart, price reversal, bearish patterns, morning star pattern
References
- The Sovereign Investor. “Evening Star Pattern: What Does It Mean and How to Trade It Properly?”
- Elearnmarkets. “5 Powerful Bearish Candlestick Patterns”.
- TheStreet. “What Are the Opening & Closing Prices in the Stock Market?”
- Stock-Screener.org. “Doji Candlestick Pattern”.
