Evening Star Candlestick Pattern

An evening star pattern is one of the most obvious indicators for beginner traders who have started learning about technical analysis. It indicates that buying momentum is fading and sellers are stealthily seizing control. However, it is far ahead of this.

Unlike other patterns, an evening star pattern consists of three candles. Let us understand the evening star candlestick pattern meaning in more detail and how to spot it.

What Does an Evening Star Candlestick Pattern Mean?

An evening star pattern forms three candles on an asset price candlestick chart. With the closing price settling above the open price, the first one is a long-body candle, signifying a significant price increase.

With a smaller-bodied candle and a bearish candle at the end, the pattern seems to be a large bullish one. The rising momentum in the asset price is shown in this bullish candle.

What Does an Evening Star Candlestick Pattern Highlight?

Since it may forecast changes in price momentum and investor sentiment, the evening star pattern is an important tool for technical analysis. Three candles, one for each day, make up an Evening Star design.

• Day 1

  The asset price rises with significant momentum on the first day, when there is a long bullish candle.

• Day 2

  When the star appears on the second day, the momentum begins to weaken following a sharp spike in price that was reflected by a gap up. Nevertheless, the second day remains a day of uncertainty between bullish and bearish sentiment.

• Day 3

  The market will reverse momentum, and traders should make a short decision if there is a gap down when the market opens on the third day. An evening star pattern is therefore validated when the price closes much lower at the end of the third day.

How to Spot an Evening Star Candle Pattern?

Follow the pointers below to identify an evening star pattern:

1. Existing Uptrend

   You can see a string of higher highs and higher lows.

2. A Larger Bullish Candle

   The bullish is the first candle, showing that asset values are moving strongly higher. On the second day, momentum weakens and is frequently marked by a gap up.

3. A Small Bearish or Bullish Candle

   The second candle can be seen as tiny. It is the first indication of a weakening upward trend. Its gap-up opening suggests that the market is volatile.

4. A Large Bearish Candle

   The beginning of new selling pressure is revealed by this candle. It opens lower than the previous close in non-forex markets. This marks the start of a fresh downward trend.

How to Trade Using an Evening Star Candlestick Pattern?

Follow the guidelines below to trade using an evening star pattern:

1. Price Analysis

   Analyse the high, low, close, and open prices within a particular chart and find out the pattern of the evening star chart. You can see two bullish candlesticks, followed by a bigger bearish one, indicating a reversal.

2. Integrating RSI Indicator

   To determine if the market is overbought, combine the candlestick pattern with the Relative Strength Index (RSI). You must place exit orders when the RSI crosses 70 with the evening star, which confirms a reversal signal.

3. Entering the Market

   Recognise the three candles to identify market entrance patterns. To begin a new short position, place a sell order below the third candle.

4. Setting Stop-Loss

   To spot possible bearish reversals, place the stop loss above the evening star chart. To reduce possible losses, set the stop loss above the Doji candlestick.

5. Time Frame Shift

   Once you have identified the overbought situations, change the attention to a shorter time horizon. This change provides exact price points for placing sell or exit orders. This guarantees maximum speed without compromising precision.

Advantages of the Evening Star Candlestick Pattern

The Evening Star candlestick pattern offers several advantages for traders in the Indian stock market.

1. It serves as an early warning of a potential shift from a bullish to a bearish trend, helping traders exit long positions before prices decline.
2. In indices like NIFTY, SENSEX, or popular stocks, the pattern is often seen near market tops and gains more reliability when supported by trading volume and momentum indicators.
3. The distinct three-candle formation: a bullish candle, a small indecisive candle, and a bearish candle, makes it simple for traders to recognise without complex analysis.
4. It allows traders to plan short-term sell positions or profit-booking opportunities, especially during overbought market conditions.

Limitations of an Evening Star Candlestick Pattern

Although an evening star pattern helps a lot, it also has some limitations:

1. This indicator performs best when combined with market analysis and other technical tools.
2. If false signals are not verified by other indications, they may result in possible losses.
3. Market circumstances, such as news stories or earnings releases, may impact the dependability of this candlestick pattern.

Final Thought

An evening star pattern is a popular technical analysis method that traders use to predict possible bearish reversals. To improve the accuracy of your transactions, you must constantly implement risk management strategies and other confirmation indicators.

To get help like this, technical indicators and other patterns, download the PL Capital Group – Prabhudas Lilladher application. PL allows you to find patterns and trends and examine historical price and volume data.

Frequently Asked Questions

1. In terms of forecasting market reversals, how accurate is the evening star pattern?

The evening star has a 71% accuracy rate in predicting a bearish reversal, according to Bulkowski’s Pattern Site. However, you should utilise other indicators as well and not rely solely on them.

2. What are the main features of the evening star candlestick pattern?

A huge bullish first candle, a small-bodied second candle that indicates hesitation, and a massive bearish third candle that closes deep within the first candle’s body make up the evening star pattern.

3. What are the differences between the morning and evening star patterns?

An evening star is a bearish reversal pattern that suggests a possible decline following an upswing, whereas a morning star is a bullish reversal pattern that suggests a possible uptrend following a downtrend.

4. Which volume patterns can you see in an evening star pattern?

In an evening star pattern, the first day indicates an elevated volume, the second day shows a reduced or mixed volume, and the third day indicates an expanding volume.