What is the Evening Star Pattern?
The Evening Star candlestick pattern is a bearish pattern used by technical analysts to detect when a trend is about to reverse.
It occurs at the end of an Uptrend to signal a reversal into a downtrend. The Pattern comprises 3 candlesticks.
It begins with a large bodied bullish candlestick, then a gap up followed by either a small bodied candlestick or a doji, then a gap down followed by a bearish candlestick which closes at a level below half of the body of the first candlestick of the pattern or even lower.
Once you identify such a candlestick pattern, it is prudent to use technical indicators like the Relative Strength Index (RSI) to confirm bearish reversal before entering a position.
Trading the Evening Star Candlestick Pattern in Olymp Trade.
- Identify an Uptrend – because the evening star is a bearish reversal candlestick, seek to find it where there has been an uptrend so that it will almost be certain that a downtrend is imminent. See if the price keeps moving up forming higher highs and lows and there is your uptrend.
- Identify the Evening Star Pattern – on that uptrend, spot the evening star pattern – a large bodied bullish candlestick, then a gap up followed by either a small bodied candlestick or a Doji, then a gap down followed by a bearish candlestick which closes at a level below half of the body of the first candlestick of the pattern or even lower.
- Confirm Trend Reversal – you want to be sure that the evening star pattern you just spotted has a high probability of causing a downward trend reversal. Observe the RSI to see that it reads above its upper limit showing an overbought condition. Overbought conditions means that buyers have pumped in all their resources in buying the asset and are now exhausted. Sellers are about to set in and steal the show.
- Enter a Sell Position – once you have identified and confirmed that for sure, the evening star pattern will cause a downward trend reversal, then you are hereby qualified to enter a Sell position after the last candlestick of the pattern.
- Adjust your Stop Loss – your Stop Loss Order is best suited at a level which coincides the highest high within the evening star pattern. Among the three candlesticks of the pattern, see which one posts the highest high and place your Stop Loss at the level of the highest high.
- Adjust your Take Profit – apply a reasonable risk to reward ratio of at least 1:2 or so. You can also decide to actively manage your trade by use of a manual trailing stop loss.
2. Fixed Time Trading.
- Adjust your trade duration 3 to 5 time your candlestick timeframe.
- Do everything as in Forex Trading until Confirmation of Trend Reversal.
- Enter a Down Trade after Confirmation – adhere to your money management strategy in setting your trade size.
- Wait for your trade to expire.
That’s all on trading the Evening Star Candlestick Pattern.