The Morning Star is a bullish reversal pattern that shows up after a downtrend, suggesting a likely shift towards a bullish market sentiment.
It consists of three candlesticks: a long red one, followed by a short red or green candle, and then a long green one. Ideally, the second candle gaps down from the first, and the third gaps up from the second. Traders closely watch for this pattern, as it indicates a potential turnaround in market momentum.
Most traders anticipate the market will keep falling while it is in a bearish trend. Traders are either shorting the market or exiting it as they wait for a positive direction to begin because the market attitude is currently pessimistic.
Morning Star in a nutshell
- Bullish reversal pattern appearing after a downtrend, suggesting a shift towards bullish sentiment.
- Consists of three candlesticks: long red, short red/green, and long green.
- Morning Star in Binary Options: Three-candle pattern indicating upward trend shift, enter higher/call trade.
Understanding the Morning Star Pattern in Trading
A morning star pattern is a three-candle pattern that signifies a potential reversal in the market trend. Morning star patterns can visually indicate the beginning of a shift from a negative to a bullish trend. The pattern typically consists of a bearish candlestick, followed by a small-bodied candlestick with a lower low, and finally, a bullish candlestick with a higher high. While the pattern itself is visually identifiable, exact calculations are not possible.
The confirmation of a morning star pattern often occurs after the third candle has closed, revealing a bottoming out process. Traders often rely on additional technical indicators like support zones and the relative strength indicator (RSI) to confirm the formation of a morning star pattern and make informed trading decisions.
Still, as already noted, they are more reliable when other technical indicators support them. The volume that contributes to the pattern development is another crucial element. Throughout the pattern’s three sessions, a trader often looks for increasing volume, with the third day displaying the largest book.
How to trade the Morning Star with Binary Options?
If you’re trading binary options, knowing how to work with the morning star pattern can be a game-changer. This pattern, made up of three candles, usually shows up when prices have been falling, hinting at a possible shift to an upward trend. The importance of this pattern lies in the transition from a downward trend to an upward trend. When you see the morning star candlestick pattern, consider entering a higher/call trade to capitalize on the expected upward momentum.
Identifying the Pattern
- First Candle: A red, bearish large body, representing a substantial price drop.
- Second Candle: A small body and closes below the first candle, suggesting market indecision.
- Third Candle: A large body, signifying a significant price increase.
The chart above shows a morning star pattern (highlighted by the rectangle) in binary options, signaling the end of a downtrend and the start of an uptrend.
Morning Star Trading Strategy
When trading with the morning star pattern, incorporating additional indicators can significantly improve your strategy:
Support Level
Look for situations where the morning star pattern appears near support levels. This indicates a possible change from a downtrend to an uptrend, providing a clear entry point and indicating a change in market sentiment. When this setup appears, consider entering a higher trade.
The chart above illustrates a morning star (highlighted by the rectangle) forming at a support level, signaling an uptrend.
Relative Strength Index (RSI)
When the RSI signals that conditions are oversold at the same time as the morning star pattern, this strengthens the case for a bullish reversal. In such scenarios, consider entering a higher trade.
The chart above shows the formation of a Morning Star within the oversold zone of the RSI indicator, signaling a potential bullish reversal.
Conclusion
The Morning Star candlestick signaled a bullish reversal, a triple candlestick formation. It forms at the bottom of a downtrend and signals that the downtrend is about to change direction. It comprises three candles: a bearish candlestick as the first, a bullish or bearish candle with a small body as the second, and a bullish candle as the third.
The morning star’s middle candle reflects a period of market turbulence when bulls start to overtake bears. The third candle may indicate a new upswing, which validates the reversal. The evening star is the pattern that stands in opposition to the morning star and denotes the transition from an uptrend to a downturn.
