Many candlesticks patterns are useful to traders for profitable outcomes. Among the most important ones is the evening star candlestick pattern, which basically points to trend shifts.
The Evening star signals a possible change in the current trend and also helps to identify a bearish reversal during a diminishing uptrend. In this article, we will explore the Evening Star candlestick pattern, its formation, interpretation, and application in trading.
What is the Evening Star Candlestick Pattern? The Evening star is a 3-part pattern.
The candlestick pattern consists of both green and red candles. It gives a signal for a potential trend change. It usually appears at the end of an uptrend, essentially predicting the beginning of a downtrend.
The initial or first candle of the formation is usually a long bullish candle. This appears to give a clue of the current bullish movements.
The second candlestick of the formation has a small body. It may be bullish or bearish, essentially predicting a period of indecision of traders.
The third candlestick is the last candle that completes the formation. It is a bearish candle. Characteristically-long and confirms a bearish reversal.
How to Identify the Evening Star candlestick pattern?
To identify the Evening Star candlestick pattern, look for the following characteristics:
1. The first candlestick is usually a green candle. It signifies that there’s a bullish trend in place.
2. The second candle is a small-bodied candle that indicates indecision and a potential shift in sentiment. It could be bullish or bearish.
3. The third candle is also long, just like the first. Although, in this case, it is a red candle. It means that the current bull market will begin a downtrend.
The second candle can take various forms, including a Doji, Hammer, Shooting Star, or Spinning Top. The key is that it should have a small body and show a lack of conviction in the market.
How to Interpret the Evening Star Candlestick Pattern
The pattern is a firm indication of a bearish reversal during a bull market. The first long bullish candle shows the strength of the uptrend, but the small-bodied second candle indicates that the trend may be losing steam. The third candle, a long bearish candle, confirms the bearish reversal and signals the beginning of a downtrend.
The Evening Star pattern is more reliable when it appears after a prolonged uptrend and at a resistance level. There’s usually a quite clear indication that a downtrend is inbound. A further decline is highly probable upon the formation of an evening star. The most probable ways to utilize the evening star pattern during crypto trading are:
1. Shorting the crypto asset: Traders can initiate short positions after the formation of the Evening Star pattern. Traders can put their stop-loss at the top of the green candlestick. They can also put a profit target at a support level.
2. Selling options: Options traders can sell call options or buy put options after the formation of the Evening Star pattern. Traders may put their stop-loss at the top of the first candlestick. A support level is a decent spot to target profit.
3. Exiting long positions: Traders holding long positions can exit their positions after the formation of the Evening Star pattern. A stop-loss is good at the bottom of the third candlestick in case the pattern creates a false signal.
Limitation of the Evening Star Pattern
This candlestick pattern is not foolproof like many others previously discussed. There’s a possibility of false signals every once in a while. Experienced traders use the pattern in combination with some other technical indicators. This helps to better confirm entry and long position decisions.
The evening star can help traders understand when a crypto market is about to take a turn. It is a powerful formation that helps experienced traders make informed trading decisions. Traders should look for the three characteristic candles and interpret them in the context of the overall market conditions. They should also use other technical indicators and fundamental analysis to confirm the trend reversal before making a trading decision.
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