A morning star is a bullish candlestick pattern that consists of three candles. The first bar is a large red candlestick located within a defined downtrend, the second bar is a small-bodied candle (either red or green) that closes below the first red bar, and the last bar is a large green candle that opens above the middle candle and closes near the center of the first bar’s body.
It is a reversal candlestick pattern which is bullish in nature and appears at the end of a down trend. It is a complex pattern made of three candlelines. The first candle is bearish in nature, the second is indecisive in nature and third candle is bullish in nature.
It is so named because just like the planet mercury, which is the star of early morning, appears just before the sun rise, this pattern appears just before price rise.
The morning star is signaling a change in trend from bearish to bullish. Traders use it as an early indication that the downtrend is about to reverse. A morning star pattern can be useful in determining trend changes, particularly when used in conjunction with other technical indicators. Many traders also use price oscillators such as the moving average convergence divergence (MACD) and relative strength index (RSI) to confirm the reversal.
Formation of Morning Star Signal Pattern
Morning Star Candlestick Pattern is formed by the combination of three candlesticks. The first one is a falling red candle, the second is a red or green confusion candlestick and the third is a reversal bullish green candlestick.
The market is in a down trend. The price opens at almost high of the day and as usual the sellers continue to sell. At the end of the session the price closes almost at the bottom for the time period. This results in the formation of bearish red candle, which is the first candle of the Morning Star Candlestick Pattern.
On the next day or next time period the price opens below the low of the real body of the previous bearish candlestick. Sellers are making new short trades. Those who are already short in the market are also adding to their position. But the smart money creeps in and starts accumulating shares from these ignorant sellers. As the demand increases the momentum of fall decreases. Accumulation is slow but firm. At the end of the session prices closes near the opening, either just below or just above the open. This results in a small body of the second candlestick.
Next day is the decision day. Bulls are aggressive. The price opens above the real body of the previous candlestick. Through out the session the buyers keep buying. Tremendous increase in the demand over the supply drives the prices high. As the new short sellers are all in loss, they also start to buy back to minimize their losses. Sensing the change in the trend, the old bears starts booking profits in their short positions. As the bulls continue to increase their long position, the price rise further and at the end of the session the price closes well above the open price resulting in a bullish tall green body of the third candlestick of this Morning star pattern.
Identifying the Morning Star signal is relatively easy. It is visually apparent to the eye. There are some very simple parameters that can enhance the Morning Star signal’s probabilities of creating a reversal:-
- The longer the red candle and the green candle, the more forceful the reversal. This demonstrates a more severe change in investor sentiment.
- The more indecision that the star day illustrates, the better probabilities that a reversal will occur, such as a Doji signal.
- A gap between the first day and the second day adds to the probability that a reversal is occurring. A gap before and after the star day is even more desirable.
- The higher the close of the third day, coming up past the middle point of the red candle of the first day, reveals more potential in the strength of the reversal.