What is the Evening Star Pattern?

The Evening Star Pattern is a bearish reversal pattern that occurs at the end of an Uptrend to signal the reversal of such a trend into a downtrend.

It is made up of three candlesticks.

A large bullish candlestick begins, then a gap up followed by either a small-bodied candlestick or a Doji, and lastly, 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.

The third candlestick of the pattern may even engulf the first, closing way below it, giving even a stronger bearish signal.

Note that we said the second candlestick of the pattern can either be small-bodied or a Doji.

Also note that if that second candlestick is bodied then it can either be bullish or bearish, with upper and lower shadows.

A Doji has no body but a line for a body and the lower and upper wicks.

We also talked of a gap up before and a gap down after that second candlestick of the pattern. Those gaps may be there or sometimes not so clear to be seen.

Candlestick patterns alone, as I always say, may not be sufficient to make trading decisions.

The use of technical indicators in conjunction with candlestick patterns is therefore highly recommended.

The Evening Star Pattern is best combined with the Relative Strength Index (RSI).

If you are trading FTTs, set your trade duration to about 3 or more times the candlestick time frame.

This ensures that the price has enough time to move in order to eventually favor you as you strive to make profits.

Trading Using the Evening Star Pattern.

Having knowledge of the Evening Star Pattern is not enough until we make money out of it.

That is exactly what we want to establish here – how to trade profitably using the Evening Star chart Pattern.

Trade using the Evening Star Pattern in the following simple and quick steps;

1. Identify an Uptrend.
2. Identify the Evening Star Pattern.
3. Confirm Trend Reversal.
4. Enter a Sell Position.
5. Adjust your Stop Loss.
6. Adjust your Take Profit.

1. Identifying an Uptrend.

We mentioned that the Evening Star Pattern is a bearish reversal pattern that occurs at the end of an Uptrend to signal the reversal of such a trend into a downtrend.

You, therefore, need to make sure that you are dealing with an Uptrend in the first place, then the other events will follow.

How do you tell that a trend is an uptrend?

Observe the price action.

If the price keeps moving upwards forming both higher highs and lows, then there you have your uptrend.

Proceed to the next step.

2. Identifying the Evening Star Pattern.

The Evening Star Pattern, as earlier established, will form at the end of an Uptrend.

The specifications of the evening star are very clear as described above.

It is made up of three candlesticks.

A large bullish candlestick begins, then a gap up followed by either a small-bodied candlestick or a Doji, and lastly, 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.

The third candlestick of the pattern may even engulf the first, closing way below it, giving even a stronger bearish signal.

If you just observed such a formation, then you have your Evening Star Pattern candlesticks. Proceed to the Next Step.

You can also use an evening star pattern scanner to establish a Doji evening star pattern, a bearish evening star pattern, and even morning star patterns.

3. Confirming Trend Reversal

Having identified the Evening Star Pattern may not be enough for you to execute that Sell trade.

You need to be sure that the uptrend will actually reverse into a downtrend as anticipated.

This is where the combination of the Evening Star Pattern with the Relative Strength Index (RSI) comes into play.

An uptrend which is getting exhausted and ready to reverse will be displayed by the Relative Strength Index tool as an overbought condition.

Overbought conditions mean that buyers have pumped in all resources they had and Sellers can now begin dominating the markets.

Coupling an overbought condition with an Evening Star Pattern will give even a stronger affirmation of the bearish reversal.

Therefore to confirm that the trend is actually about to reverse, keep your eyes on the RSI.

An overbought condition will be displayed by readings above 70 or so, according to your settings of the tool.

If you, therefore, spot an overbought condition, your bearish reversal is confirmed and can proceed to the next step.

4. Entering a Sell Position.

You just confirmed that the trend will reverse downwards. That then calls for a Sell position to profit from the upcoming downtrend.

5. Adjusting your Stop Loss.

Still, trading without Stop Loss orders?

You need to know better than put your capital at risk.

When trading this Pattern, consider the highest high of the three candlesticks which form the pattern.

Of course, those three candlesticks have high prices at different levels.

What you go for is the highest high among the three, then place your Stop Loss at that level.

6. Adjusting your Take Profit.

We have no basis for measuring to estimate how long the downtrend is about to take. You, therefore, need to establish two factors here – if you are going to stay active and use trailing stops to lock profits or will leave the trade after applying a sound risk to reward ratio.

If you will stay active during the trade, the trailing stops can work for you.

You can keep moving your Stop Loss down as you lock profits and as the downtrend continues.

However, if you will leave the trade running, then you better decide how much risk to reward ratio you can take.

Compare the amount risked by the Stop Loss with your anticipated profit to know where to place your Take Profit.

A risk to reward ratio of 1:3 or thereabout is not that bad.