What is Evening Star Pattern- Uses, application and examples- a simple explination

Have you ever wondered how technical analysts analyse the charts and make trading decisions? They use candlesticks in this process. Candlesticks are a technical tool that packs data for multiple timeframes into single bars. These bars are very simple and easy to read. Multiple candlesticks form different patterns which can help in predicting the price actiont. In this article, we will be looking at the Evening Star Pattern.

Table of Contents

  1. What is a Candlestick?
  2. What is Evening Star Pattern?
  3. Understanding Evening Star Pattern
  4. What does an Evening Star Pattern tell?
  5. Example
  6. References

What is a Candlestick?

A Candlestick is a price candlestick pattern that depicts the Open, High, Low and Close of a particular security for a specific period. Candlesticks are vastly used to analyse the price movement in Technical Analysis. The concept of Candlesticks was first developed in the 1700s by Munehisa Homma, a Japanese rice trader [1]. He found a link between the price and supply and demand of rice and the emotions of the trader. Candlesticks depict the emotions of the traders by visually representing the size and colour of the candlestick. Traders make decisions based on these candlesticks. Candlesticks were first introduced to the western world by Steve Nison in his book, Japanese Candlestick Charting Techniques [2].

What is Evening Star Pattern?

The evening star pattern is a type of reversal pattern of the price of any security. It usually appears in an uptrend, and it is an indication of a bearish market. It consists of 3 candles: a large green candlestick, a small-bodied candle, and a red candle. This pattern is not commonly seen by traders but is a reliable indicator for technical analysts. This pattern rarely appears, but it is considered to be very reliable.

doji candle

A doji is a kind of session in trading observed in pattern, when open and close are both equal. A doji looks like an inverted cross, or plus sign. In japanese doji means blunder or mistake. In trading this is taken as a sign of reversal.

Understanding Evening Star pattern

The evening star pattern consists of 3 candles. The first candle has a long green body that represents a rise in price and bullish sentiment. This indicates that the price may have upward momentum. The second candle is the ‘star’, which has a small body either green or red. The third candle opens a gap down from the preceding star candle. The third candle is bearish, with the close price lower than the open price. Thetop of an uptrend has been reversed and the bullish market has been eliminated. This candle confirms the evening star pattern and gives a selling signal. The technical analyst focuses more on the open and close of these candles rather than the high and low for that time period.

What does an Evening Star Pattern tell?

The Evening Star pattern is a useful tool for the technical analyst as it can predict market sentiment and changes in price momentum. The Evening Star pattern consists of three candles, one for each day. On the first day, the asset price moves upward with strong momentum. This momentum weakens on the second day, and a star-like Candlestick appears. A lot of indecisiveness takes place on the second day between the bears and the bulls. If the market opens the gap down on the 3rd day, it is an indication that the momentum will be reversed, indicating the traders to make a short position. When the price is comparatively lower on day 3, the evening star pattern is confirmed. The smaller body indicates that there is a balance between the buyers and sellers. The star signal slows the momentum formed by the previous candle.

References

[1]R. L. Greg L. Morris, Candlestick Charting Explained: Timeless Techniques for Trading Stocks and Sutures, Unknown: McGraw-Hill Education, 2006.
[2]S. Nison, Japanese candlestick charting techniques: a contemporary guide to the ancient investment techniques of the Far East, Unknown: New York: New York Institute of Finance, 2001.

Leave a Reply