Morning Star

Morning Star

The morning star is a bullish reversal signal found at the bottom of a downtrend and is a three candle pattern. This signal suggests to investors that good things are to come, or in other words, that prices are going to increase. In order to qualify as a morning star signal four criteria must be met. First, the stock must have been in a definite downtrend before this signal can occur. Second, the first day of the signal must confirm the current downtrend by displaying a long red (or black) real body. Third, the second day displays a candle formation that indicates a state of indecision as the star gaps away from the first day. Lastly, the third day should display a green (or white) candle that should close at least halfway up the red (or black) candle. In other words, the long green body gaps up from the prior star. This third candle provides the confirmation needed to indicate a reversal. This confirmation is apparent in the morning before the sun rises, thus giving this signal its name.

What does this signal indicate is happening in the markets?
On the first day of this signal the bears are in complete control as a strong downtrend has been in place. On the second day, there is indecisiveness as this day gaps down and the range of trading taking place stays essentially the same for the day. This day indicates that the bears and the bulls are at an equilibrium thus causing the star formation. On the third day the bulls step in and they increase their buying. The bulls have been able to open the price higher than the previous day’s close therefore causing fear for the bears. As a result the bears begin to cover their short positions and the buyers are now in control.

When identifying this signal there are additional factors to look out for. First, the longer the red candle and the green candle, the more powerful the reversal. Second, there is a higher probability that a reversal will occur, with the more indecision that occurs on the second day. Another factor that increases the probability of a reversal is the gap between the first and second day. If this gap occurs it adds to the likelihood that a reversal will occur. Also, when looking at gaps, a gap that occurs before and after the second day adds to the strength of this signal. Lastly, the strength of the reversal is indicated by the magnitude in which the third day closes up more than halfway up the green candle.

There are many additional signals important to learn about when studying Japanese Candlesticks. While the morning star signal is very important, other signals such as the candlestick hammer signal, the inverted hammer candlestick, the hanging man candle, the candlestick piercing pattern, and the dark cloud cover are also equally important. Many investors begin studying candlestick patterns by learning about the doji candlestick chart and they also explore other areas of technical analysis. Learn how to increase your profit through candlestick trading online and join me in my 2-Day Trading for Profits Online Training Clinic.

Please continue your Japanese candlesticks education and read about the evening star candlestick.