Catching the turn of a major trend reversal can be profitable and the morning star candlestick pattern is a great price action pattern to look at for catching a market reversal.
Candlestick patterns, while not perfect, can allow a trader to catch a trend reversal because they do highlight the change in market sentiment. Some candlestick patterns such as the morning star reversal pattern, are a little better at it than others.
Acting as a bullish reversal pattern, we need to have a market in an obvious down trend. Markets in consolidations are a little less predictable between the extremes but you could look at lower time frames for a trend while the higher time frame is consolidating between support and resistance.
Once we have a market in a down trend, traders need to have a reason why the market could be looking at a bullish reversal.
Where To Look For Morning Star Candlestick Pattern
Once you have determined the market is in a down trend using a candlestick chart for easier viewing (hint: lower highs and lower lows) the next step is to see if there is a technical reason for a potential reversal. Let’s look for the morning star candlestick patterns when:
- Price is falling into an area of potential support
- The market has registered an oversold reading on a technical indicator such as Stochastic or RSI
- Look at a confluence area where a Fibonacci number, a moving average or even diagonal trend lines intersect.
Taking a trade at a random location on a chart simply because a candlestick pattern has shown up is not smart trading. Build the case as to why you are willing to put risk on in the market before you ever hit the buy button.
Morning Star Candlestick Pattern Explained
Let’s think about this for a second. What are we really looking for when seeking to take a reversal type trade? We are looking for the current trend to exhaust itself in some manner and then have the opposing side (looking for buyers or those exiting short positions) step in to drive the market.
This graphic shows a market in a down trend with obvious bearish candlesticks into the low. A small candlestick appears (any color is fine), perhaps an indecision candlestick such as a doji or spinning top, by gaping below the body of the down candlestick.
On the next candlestick of this 3 candlestick pattern, price gaps the real body of the small candlestick and close at least 50% of the way up the first candlestick in the pattern. Using a rule based approach, don’t consider a pattern where the opposing direction candlestick barely close in the real body of the first candlestick, as a morning star reversal pattern.
Keep in mind that the third candlestick that forms completing the morning star pattern is “too large”, it is safe to expect some type of draw down if you enter at the close of the candlestick.
Often times strong momentum is slightly retraced but the failure of this reversal pattern is a continuation of the previous trend direction.
Be Conservative – Expect Trend Resumption
When trading any reversal pattern, the probability is that the previous trend will resume and traders should have proper risk protocols in place. Traders would want to watch for any momentum against the third candle in the pattern which is the bullish candle.
The key is to watch for positive follow through to confirm the reversal. If the new direction is to be sustained, while we expect a slight pullback, in the end we need the market to start putting in higher highs and lows to confirm a new trend direction.