Morning Star Pattern: What Is It and How To Trade It?

What Is the Morning Star Pattern?

The Morning Star candlestick pattern is a classic bullish reversal pattern in technical analysis.

Traders use this pattern to indicate that a bear market will see an uptrend movement, also known as a reversal to a bull market.

• Bearish Market: A market condition where prices are falling and are expected to keep declining. So, a “bearish candle” (red or dark blue) would signal prices decreasing.

• Bullish Market: The opposite of a bearish market, where prices are rising and are expected to continue increasing. So, a “bullish candle” (green or white) would signal prices increasing.

How the Morning Star Pattern Develops

The morning star in forex is a triple candlestick pattern consisting of three candlesticks.

To spot a Morning Star candlestick formation on forex charts, look for these specific characteristics:

• First Candle: A long, bearish candle indicating significant selling pressure.

• Second Candle: A small-bodied candle (either bullish or bearish) showing indecision in the market.

• Third Candle: A long bullish candle signaling a shift in momentum towards buying.

The second candle's body should be below the first candle’s close, and the third candle should close at least halfway up the first candle's body.

The Morning Star pattern appears on charts after a downtrend, signaling a potential uptrend.

When & Where Morning Star Patterns Occur?

The Morning Star pattern typically forms after a downtrend, signaling that selling pressure may be fading. It often appears near key support levels, where buyers are more likely to step in.

This pattern also shows up during periods of market indecision, when momentum slows and the market prepares for a potential reversal.

These conditions make the Morning Star a useful signal for identifying morning star pattern entry setups on a chart. It can be applied on a morning chart or any timeframe when using a morning star trading pattern strategy.

Morning Star Pattern vs. Doji Morning Star Pattern

While the standard Morning Star has a small-bodied second candle, the Doji Morning Star candlestick pattern features a Doji candle as the second candle.

A Doji candlestick pattern looks like a cross, inverted cross, or plus sign. It is characterized by having little to no real body and occurs when the open and close prices are virtually the same.

A Doji indicates even more indecision in the market and can sometimes signal a stronger potential reversal since it shows a greater struggle between buyers and sellers.

Morning Star Pattern vs. Evening Star Pattern

The Evening Star candlestick pattern is the bearish equivalent to the Morning Star. It signals a potential downward reversal and consists of:

1. First Candle: A long bullish candle, as opposed to the bearish candle of the Morning Star.

2. Second Candle: A small-bodied candle, indicating market indecision.

3. Third Candle: A long, bearish candle, as opposed to the bullish candle of the Morning Star.

While the Morning Star pattern indicates a shift from bearish to bullish, the Evening Star suggests a shift from bullish to bearish.

How to Trade Morning Star Pattern

To effectively trade the morning star reversal pattern, you must first identify it following the directions above. Then, you have to confirm the pattern by using other indicators.

While the Morning Star pattern is reliable, it can still produce false signals, especially in choppy or trendless markets.

Identify and Confirm the Pattern

First, spot the Morning Star after a downtrend. Then confirm it using indicators like volume, RSI, or MACD.

Confirmation helps filter out false signals, especially in choppy markets.

Entering the Trade

Most traders enter a long position at the close of the third candle or the open of the next one.

This allows you to catch the early upward momentum.

Setting a Stop Loss

Place your stop loss below the low of the second candle, which represents the pattern’s support zone.

Other stop-loss methods include:

• Fixed % or amount: Risk 1–2% of capital.

• Trailing stop: Move it up as price rises.

• Time-based exit: Close the trade if price doesn’t move in your favor after a few candles.

Setting Profit Targets

Identify nearby resistance levels to set realistic profit targets. Use the high of the third candle as an initial reference.

If this aligns with a major resistance area, it makes a strong target.

Indicators to Trade with Morning Star Pattern

Choosing the right indicator to complement the Morning Star pattern can significantly enhance your trading strategy.

While there's no one-size-fits-all answer, here are a few worth considering in the morning star technical analysis:

Relative Strength Index (RSI)

Imagine RSI (Relative Strength Index) as your market mood ring. It measures the speed and change of price movements, indicating when a currency pair is overbought or oversold.

When RSI dips below 30, it suggests that the market is oversold, which aligns nicely with the potential reversal signaled by the Morning Star pattern.

Moving Average Convergence Divergence (MACD)

MACD (Moving Average Convergence Divergence) is like your market trend detective. It compares two moving averages to identify changes in momentum, giving you insights into whether a trend is gaining or losing strength.

A bullish crossover (where the MACD line crosses above the signal line) confirms the upward momentum indicated by the Morning Star pattern, adding conviction to your trade.

Bollinger Bands

Think of Bollinger Bands as your market boundaries. They consist of a simple moving average and two standard deviations above and below it, forming a channel representing potential price extremes.

When the price touches or crosses the lower band and coincides with a Morning Star pattern, it suggests that the market is oversold and ripe for a reversal.

Morning Star Pattern Trading Strategy

Putting everything together, here’s how you can trade the morning star reversal pattern:

1. Identify the Pattern: Look for the Morning Star after a downtrend, consisting of a long bearish candle, a small-bodied candle, and a strong bullish candle.

2. Confirm the Signal: Check for increased volume on the third candle, a key support level, and confirmation from indicators like RSI or MACD.

3. Enter the Trade: Buy when the price breaks above the third candle’s high, or wait for a breakout above resistance for more confirmation. This is the key morning star pattern entry.

4. Set a Stop-Loss: Place it below the second candle’s low, or for a conservative approach, below the first candle’s low.

5. Exit Strategy: Target the next resistance level, use a risk-reward ratio of at least 1:2, and consider trailing stops to lock in profits.

Benefits of  Morning Star Pattern

• Early Reversal Signal: Indicates a potential bullish reversal, helping traders enter at the start of an uptrend.

• Clear Entry Point: Provides a defined entry point with the appearance of a distinct three-candle pattern.

• Effective in Market Analysis: Useful for identifying market bottoms and forecasting price recoveries.

• Combines Well with Other Indicators: Can be used alongside technical indicators like moving averages to confirm trade setups.

Limitations of  Morning Star Pattern

The limitations of the morning star pattern include:

• False Signals:. There are instances where the morning star pattern  may produce false signals, leading you to enter positions prematurely.

• Depends on Market Conditions: The effectiveness of the Morning Star pattern can vary depending on market conditions and volatility.

• Needs Confirmation: The Morning Star pattern needs to be confirmed with additional indicators for its validity.

• Depends on Timeframe: While  the morning star pattern can be reliable on longer timeframes like daily or weekly charts, it may be less reliable on shorter intraday timeframes due to increased noise and fluctuations.

Conclusion

The Morning Star pattern is a valuable tool for identifying potential bullish reversals. By combining it with other indicators, you can make more informed decisions.

However, like all trading strategies, it’s crucial to recognize its limitations and use it as part of a broader trading strategy.