Morning Star Candlestick Pattern: Backtest Results

The candlestick chart is very popular among traders — not just because it is easy to visualize but also because the candlesticks can form shapes and patterns that traders can use to predict how the price might move in the future. One such pattern is the Morning Star pattern. What is the Morning Star pattern, and how do you use it in trading?

The Morning Star is a bullish reversal pattern that consists of three candlesticks — a tall bearish candle followed by a small candle that gaps below the first candle, and then a third candle that is bullish and closes above the midpoint of the first candle. This pattern is considered a strong indication of a potential bullish price reversal.

In this post, we take a look at the Morning Star candlestick pattern.

Introduction to Morning Star Candlestick Pattern

The Morning Star candlestick pattern is a price action analysis tool used to identify potential trend reversals on the price charts. This pattern is composed of three candlesticks, with the first one being a tall bearish candle. The second candle is a small one that opens and closes below the first candle, creating a gap. The third candle is bullish and closes above the midpoint of the first candle.

The pattern forms at the bottom of a downtrend or a downward price swing in an uptrend. It signifies a slowing down of downward momentum before a large bullish move lays the foundation for a new upward move.

The Morning Star pattern is considered a strong indication of a potential bullish price reversal. This pattern is widely used by traders and analysts to predict future price movements. It is especially useful for price action traders and chartists, who rely on the price action on the chart for spotting trading opportunities.

The pattern occurs on any financial market chart, such as stocks, forex, and commodities, and it can be seen on different timeframes. It is a valuable tool for traders and investors to identify potential trend reversals and the resulting trading opportunities.

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What are the components of the Morning Star pattern?

The Morning star pattern is a three-candle reversal pattern. It consists of three candlesticks, as follows:

• First candle: The first candlestick is a tall bearish candle, in line with the ongoing downward price swing. It shows that the downswing is still intact.
• Second candle: The second candlestick is a small-bodied candle, typically a doji or a spinning top. It gaps down from the first candlestick. It can be of any color, but the most important thing is that it is small and gaps below the first, in anticipation of the continuation of the existing downswing. Its typical small size suggests indecision in the market. If it is a doji, the pattern is called Morning Doji Star.
• Third candle: The third candle is bullish and quite sizeable. It opens below the second candle and closes above the midpoint of the first candle. In other words, it engulfs the second candle and pierces the first candle, indicating a potential shift in the price momentum from bearish to bullish.

How to identify the Morning Star pattern in stock charts?

Identifying the Morning Star pattern is easy. Here are the features to look for:

• A down price swing: The pattern typically appears at the bottom of a downward price swing, which can be a downtrend or a pullback in an uptrend. So, you should look for it in the right place.
• A tall bearish candlestick: The first candlestick in the pattern should be a tall bearish candle, in line with the ongoing down move.
• A gap: after the first candlestick, the price gaps down to form the second candle.
• A small candlestick: The second candlestick in the pattern is small and be either a spinning top or a doji pattern.
• A bullish candlestick: The third candle in the pattern is a sizeable bullish candle that spans from the low of the second candle to beyond the midpoint of the first candle.

How to use the Morning Star pattern in trading?

You can use the Morning Star pattern to formulate a trading strategy. The pattern gives a bullish reversal signal, but it may not be wise to use it to predict the reversal of a long-term downtrend to an uptrend. Instead, a better approach would be to use the pattern to predict the end of a pullback in an uptrend. In this case, you want to get in at the beginning of the next impulse wave to the upside. Here is how to go about it:

• Identify an uptrend and place a trendline across the swing lows. This will show the ascending support levels. Alternatively, you can use a long-period moving average.
• Mark key support levels in the market
• Wait for the price to pull back to a key support level or the trendline or moving average line
• Look for the Morning Star pattern
• If the pattern form around a support level, enter a long position on the opening of the next candle
• Place your stop loss below the low of the pullback and your profit target at the next resistance level

What are the different variations of the Morning Star pattern?

There are two key variants of the Morning Star pattern: the regular morning star and the morning doji star pattern. Both are bullish reversal patterns that form at the bottom of a downward price swing.

Regular Morning Star

This is the normal Morning Star pattern, which is a bullish reversal pattern that consists of three candlesticks — a tall bearish candle followed by a small candle that gaps below the first candle, and then a third candle that is bullish and closes above the midpoint of the first candle. The second candle in the pattern is a spinning top candlestick.

Morning Doji Star

This is similar to the regular morning star pattern. As with the regular pattern, the Morning Doji Star pattern forms at the lower end of a downward price swing and signals a bullish reversal. It also consists of three candlesticks: a tall bearish candle, a doji candle that gaps below the first candle, and a sizeable bullish candle that closes above the midpoint of the first candle. The key difference from the regular type is that the second candle in the Morning Doji Star pattern is a doji candlestick.

How to combine the Morning Star pattern with other technical analysis tools?

You can combine the Morning Star pattern with other technical analysis tools and indicators. In fact, you should use other tools to confirm the pattern anytime you are trading it. Some of the technical tools and indicators you can use with the pattern include trendline, support and resistance level indicators, moving averages, Bollinger Bands, and momentum oscillators.

For example, if you are swing trading in an uptrend, you can use a trendline or a long-period moving average to indicate the trend and show the rising support levels where you can look for the Morning Star pattern. When you spot the pattern at a support level, you can use momentum oscillators like stochastic or RSI to confirm the reversal signal. An RSI rising from an oversold region following the formation of a Morning Star pattern around a support level confirms the bullish reversal signal.

What are the common mistakes to avoid when using the Morning Star pattern?

While the Morning Star pattern can be an effective tool for traders and investors, there are some common mistakes that can lead to incorrect trading decisions. Here are some of the mistakes to avoid when using the Morning Star pattern:

• Ignoring the overall market trend: You should consider the overall market trend before making a trading decision. Not doing that can be a terrible mistake. You want to trade a pullback reversal in an uptrend, rather than attempt a full downtrend reversal.
• Jumping the guns: Taking a trade too early can be a disastrous mistake. It’s important to wait for the pattern to complete.
• Failing to confirm the pattern with other technical indicators: It’s essential to confirm the Morning Star pattern with other technical indicators. Relying solely on the pattern can lead to incorrect trading decisions.

How does the Morning Star pattern perform in different market conditions?

The performance of the Morning Star pattern can vary in different market conditions, such as bull market, bear market, and sideways market.

Bull market

In a bull market, the Morning Star pattern can indicate the end of a pullback and the beginning of the next impulse wave in the trend direction. In that case, you could use the Morning Star pattern as an opportunity to buy the dip so as to ride the next bullish impulse wave. The pattern performs best in this scenario because the trade is in the direction of an already-established trend.

Bear market

The Morning Star pattern is not very effective in a bearish market because its signal is against the downtrend. However, the pattern could signal a short-term rally or consolidation before the downtrend resumes. If you are a contrarian mean-reversion trader, you may attempt such trades but know that you would be going against the trend.

Sideways market

In a sideways market, the Morning Star pattern can be used to trade the price reversal from the support end of the price range. If the pattern forms at the support end, it signals the beginning of a new upswing toward the resistance. It is an effective spring for taking long positions in a range-bound market.

Is morning star bullish or bearish?

The morning star pattern is bullish, not bearish. It gives a bullish reversal signal when it occurs at a key support level in the right market condition. The pattern forms at the bottom of a downward price swing, which could be a downtrend or a pullback in an uptrend, where it indicates the end of the downward move and the beginning of a new swing to the upside.

Although the pattern gives a bullish signal, in a strong downtrend, the signal may not be strong enough to reverse the trend. It might only induce a temporary rally (pullback). The bullish reversal effect of the pattern is more pronounced in an uptrend or a range-bound market.

What does the morning star candle indicate?

The morning star pattern indicates a potential bullish price reversal. It is considered a bullish reversal pattern because it forms around the lower end of a downward price swing and can initiate the beginning of a new upswing. The pattern shows that the bears are losing steam and the bulls are stepping into the market to seize control.

In the right market condition, the pattern can give a strong signal for taking long positions or closing short positions. When combined with other tools, such as trendlines and support levels, the pattern can be used to formulate a trading strategy.

How reliable is the Morning Star candlestick pattern?

The Morning Star candlestick pattern can be quite reliable, depending on the setting where it occurs and the market condition. If the pattern occurs in the right setting and in a favorable market condition, it can be very reliable. Price action traders use it as a signal to spot a buying opportunity in the market.

For example, if the pattern forms around a key support level in an uptrend, it can signal the end of a pullback and the beginning of the next bullish impulse swing. The pattern is also reliable for taking long positions at the support level of a ranging market. However, it may not be a reliable signal for taking a contrarian position in a downtrend, as that would be going against the price momentum.

How strong is the morning star pattern?

The strength of the Morning Star pattern depends on the market condition and the setting where it occurs. It can be a strong signal for price action traders to spot a buying opportunity if it forms around a key support level in an uptrend. In that case, it indicates the end of a pullback and the start of the next bullish swing. The pattern also gives a strong signal for taking long positions if it forms at the support level of a ranging market. However, the pattern may not be as strong if it forms in a downtrend since it would go against the price momentum.

FAQ:

How does the Morning Star pattern indicate a potential bullish reversal?

The Morning Star is a bullish reversal pattern composed of three candlesticks: a tall bearish candle, a small gap-down candle, and a bullish candle closing above the first’s midpoint. The pattern signifies a potential shift from bearish to bullish momentum, especially when forming at the bottom of a downtrend or downward price swing.

How is the Morning Star pattern identified in stock charts?

The pattern consists of a tall bearish candle, a small gap-down candle, and a bullish candle closing above the midpoint of the first candle. Look for a downtrend, a tall bearish candle, a gap-down small candle (often a doji), and a bullish candle closing above the midpoint of the first candle.

How to combine the Morning Star pattern with other technical analysis tools?

There are two variants: the regular Morning Star with a spinning top second candle and the Morning Doji Star with a doji second candle. Combine with tools like trendlines, support/resistance levels, moving averages, Bollinger Bands, and momentum oscillators for confirmation.