In this comprehensive guide, traders will explore what this pattern is, how it works, and most importantly, how to identify it in real-time market conditions. Learning to spot this pattern can help traders identify the right entry and exit points confidently. However, identifying this pattern alone may not provide as much detailed insight as understanding how to trade it effectively, with a focus on entry and exit strategies to maximize potential gains. Beyond the technical aspects, we will also discuss the psychology behind the formation of the Morning Star, which helps explain why it signals a shift in market sentiment. We will also cover the conditions where the accuracy of this pattern is high and where it may fail. Finally, you'll learn the key factors that differentiate the Morning Star from the Bullish Abandoned Baby—a pattern that may appear similar but carries different market implications.
Table of Content
What is Morning Star Candlestick Pattern?
The Morning Star Candlestick Pattern is a trend reversal candlestick pattern used to reverse a downtrend into an uptrend. There are three candles contributing to the formation of the Morning Star Candlestick Pattern. The first candle, being part of the downtrend, is bearish in nature with a significant body size, indicating strong selling pressure. The second candle is a neutral one, not aligned with any specific trend, and is generally smaller in size compared to the other candles in the pattern. This candle can either be bullish or bearish, reflecting indecision in the market and a possible pause in the downtrend. Finally, the third candle represents the initiation of an uptrend; it is bullish in nature with a significant body size, indicating that the bulls have taken over the price action. The appearance of this pattern at the bottom of a downtrend signifies that the bears are losing control and the bulls are gaining strength. The gap between the second and third candles, along with the contrast in candle sizes, enhances the strength of the signal.
How Morning Star Candlestick Pattern forms?
The changing dynamics between buyers and sellers in the market lead to the formation of the Morning Star Candlestick Pattern. The trend preceding this pattern is downward, where bears are in control, pushing the price lower and leading to the formation of a large bearish candlestick. The significant size of the bearish candle reflects the market's pessimism and strong selling pressure. As the next trading session opens, the candle that forms represents indecision, usually caused by buyers stepping into the market or bears losing momentum. This is the reason why a smaller candlestick pattern forms, which can be either bullish or bearish in nature. The small size of the candle shows that neither side has firm control over the price of the underlying asset. Finally, as the third session begins, buyers start to overpower the remaining sellers in the market, resulting in the formation of a long bullish candlestick. This sharp rise in buying interest indicates that market sentiment has shifted, and a reversal is likely. The gap between the second and third candlesticks signifies the strength of the signal, as aggressive buying results in a significant gap between the two candlestick patterns.How to identify Morning Star Candlestick Pattern?
To identify the Morning Star Candlestick Pattern, traders need to focus on the characteristics depicted by this pattern. Since this is a bearish trend reversal candlestick pattern, its ideal position for formation is at the bottom of a downtrend. The Morning Star Candlestick Pattern consists of three candles; understanding the sequence and structure of these candles helps in identifying it. The first candle of this pattern is a long bearish candle, indicating sellers' strength. The second candle indicates indecision in the market and usually occurs with a smaller body size compared to the other two candles. In the case of the third candle forming, which is bullish and significant in body size compared to the previous candle, bulls are at their full potential, leading to the formation of this remarkable candle. There is a gap between the second and third candles, created due to aggressive buying in the market. Remarkably, the last bullish candle should close well above the middle level of the first bearish candle, which confirms that buyers have gained control and that a reversal is underway.Identifying each element in sequence and in the context of a downtrend will help the trader spot the effective Morning Star Candlestick Pattern and anticipate a probable upward move in the market.
Psychology Behind the formation of Morning Star Candlestick Pattern
The psychology behind the formation of the Morning Star Candlestick Pattern reflects a shift in market sentiment from bearish to bullish. There is a clear downtrend preceding the formation of the Morning Star Candlestick Pattern, which reinforces the sellers' optimism regarding the continuation of the downtrend. This results in a long bearish candle. However, as the session progresses, a second small indecisive candle forms, representing exhaustion of selling pressure or a pause in the current trend. Sellers holding short positions for a long period or since the beginning of the downtrend start to panic due to the pause in price, fearing that the market could reverse. On the other hand, buyers see a healthy price action and the right time to enter the market. The combined actions of both market participants direct the price to rise suddenly, resulting in a significant bullish candlestick pattern with a notable gap between the second and third candles. The strength of this long bullish candlestick amplifies buyers' optimism regarding the market reversal. This is how the Morning Star Candlestick Pattern forms.How to trade the Morning Star Candlestick Pattern effectively?
What are the conditions where the accuracy of morning star candlestick pattern is high?
The accuracy of the Morning Star Candlestick Pattern tends to be higher under certain conditions, which can enhance its reliability as a trend reversal candlestick pattern. The more conditions the pattern satisfies, the more reliable it becomes.Here are the key conditions where this pattern performs best:
1. Forming Near a Strong Support Level
The Morning Star Candlestick Pattern, being a trend reversal candlestick pattern used to reverse the downtrend into an uptrend, has its ideal position for formation at the bottom of a downtrend, which is often a key support level. The formation of the pattern at a well-established support zone provides additional confirmation. A key support zone is an important level where the number of buying positions is generally higher; this is why buyers holding long positions oppose the price falling below the support zone, leading to a reversal right from that point.
2. High Trading Volume on the Third Candle
Trading volume during the formation of the third candle plays a crucial role in confirming the pattern's validity. An increase in volume on the third candle indicates that a greater number of buyers are actively participating in the reversal, reinforcing the pattern's reliability. On the other hand, lower trading volume on the third candle indicates insufficient buying interest for this pattern, which weakens its reliability.
3. Occurring in Oversold Market Conditions
The Morning Star pattern becomes more reliable when it forms after a prolonged downtrend, especially when momentum indicators like the Relative Strength Index (RSI) indicate oversold conditions. When the market is in an oversold state, it means that selling has been overextended, making a reversal more likely as buyers seize the opportunity to enter the market at lower prices.
4. In Conjunction with a Broader Uptrend
When the Morning Star candlestick pattern appears as part of a pullback within a larger uptrend, also known as retesting, the probability of successful trades increases. In that market context, the pattern signals the end of a short-term correction, offering a buying opportunity within the larger bullish market structure. Traders often use this confluence to enter trades with greater confidence.
5. Positive Market Sentiment
When the Morning Star candlestick pattern forms in a market with strong bullish sentiment, such as favorable economic news or positive earnings reports, it adds more credibility to the pattern's reliability. The optimism among traders regarding the buying momentum strengthens its effectiveness, leading to a greater chance of a sustainable reversal.
When the Morning Star candlestick pattern forms in a market with strong bullish sentiment, such as favorable economic news or positive earnings reports, it adds more credibility to the pattern's reliability. The optimism among traders regarding the buying momentum strengthens its effectiveness, leading to a greater chance of a sustainable reversal.
6. Bullish Indication by Technical Indicators
When technical indicators like Moving Averages, MACD, and the Relative Strength Index signal that the market is in favor of buyers, indicating that it is a healthy time to enter the market, the reliability of the signal provided by this pattern increases.
Understanding this conditions helps traders to maximise the chances of successful trades behalf of this pattern.
What are the conditions where the Morning Star candlestick pattern may fails?
Similar to any indications signaled by technical indicators or even candlestick patterns, the Morning Star does not guarantee a reversal. There are certain conditions in which the formation of the Morning Star Candlestick Pattern does not make sense, or it can mislead in those situations.Here are the scenarios where this pattern may fail to provide the expected results:
1. Weak Volume on the Third Candle
The pattern constitutes three candles, with the position of each visually representing the psychology of market participants. Generally, volume is an important indicator in depicting the strength and reliability of any candlestick pattern, playing a crucial role here. The first candle of this pattern is part of a downtrend and bearish in nature; there is not much increment in the volume during its formation, nor in the indecisive middle candle. However, during the formation of the third candle, which represents the beginning of an uptrend, bulls acquire the opportunity to enter the market. Ideally, there should be a considerable volume increment on the third candle, reinforcing the strength of the bulls. Logically, if the volume on the third candle does not increase, the pattern is likely to mislead with a false signal.
2. Forming in a Strong Downtrend Without Other Confirmation
When the Morning Star appears to form during the continuation of a well-established and strong downtrend—especially when there is no additional confirmation from considerable price action or indications from technical indicators—it is likely to produce a false reversal signal. The reason behind the formation of the pattern in such situations could be a temporary pause in the downtrend rather than a complete reversal. Traders entering the market under these circumstances are likely to experience losses.
When the Morning Star appears to form during the continuation of a well-established and strong downtrend—especially when there is no additional confirmation from considerable price action or indications from technical indicators—it is likely to produce a false reversal signal. The reason behind the formation of the pattern in such situations could be a temporary pause in the downtrend rather than a complete reversal. Traders entering the market under these circumstances are likely to experience losses.
3. Absence of Key Support Levels
Since the Morning Star is a trend reversal candlestick pattern that reverses the downtrend into an uptrend, its ideal position for formation is at the bottom of a downtrend, often at a key support level. Support levels resist the price from declining further; in their absence, there is no restriction on price movement, which diminishes the reliability of the reversal signaled by this pattern. Therefore, the appearance of this pattern at a key support level validates the reversal it signals.
Since the Morning Star is a trend reversal candlestick pattern that reverses the downtrend into an uptrend, its ideal position for formation is at the bottom of a downtrend, often at a key support level. Support levels resist the price from declining further; in their absence, there is no restriction on price movement, which diminishes the reliability of the reversal signaled by this pattern. Therefore, the appearance of this pattern at a key support level validates the reversal it signals.
4. Overbought Market Conditions
Whenever overbought conditions exist in the market, the pattern may fail because the upward movement is already exhausted. Indicators like the Relative Strength Index (RSI) can help identify overbought conditions. When bulls are already stretched, weakening the bullish momentum, the Morning Star may not have enough strength to sustain a reversal signaled by its formation.
Whenever overbought conditions exist in the market, the pattern may fail because the upward movement is already exhausted. Indicators like the Relative Strength Index (RSI) can help identify overbought conditions. When bulls are already stretched, weakening the bullish momentum, the Morning Star may not have enough strength to sustain a reversal signaled by its formation.
5. Negative Market Outlook
Whenever the formation of this pattern is not supported by positive signals from any indicators, entering the market solely based on the formation of this pattern could harm the trader's or investor's portfolio. Additionally, if there is a divergence between the indicators and the pattern’s formation—for instance, this is a bearish trend reversal candlestick pattern, ideally, it should form when the indicators indicate a buying signal. If it forms even when the indicators are signaling a sell, it does not make sense to enter based on this pattern.
Whenever the formation of this pattern is not supported by positive signals from any indicators, entering the market solely based on the formation of this pattern could harm the trader's or investor's portfolio. Additionally, if there is a divergence between the indicators and the pattern’s formation—for instance, this is a bearish trend reversal candlestick pattern, ideally, it should form when the indicators indicate a buying signal. If it forms even when the indicators are signaling a sell, it does not make sense to enter based on this pattern.
What is the difference between Morning Star and Bullish Abondoned Baby Candlestick Pattern?
There are two identical patterns called the "Morning Star" and the "Bullish Abandoned Baby" candlestick patterns, which may appear nearly identical at first glance. However, the characteristics and psychological implications of each differentiate them from one another. The Morning Star Candlestick Pattern consists of an indecisive candle positioned between a bearish candle and a bullish candle. In contrast, the Bullish Abandoned Baby also shares a similar structure, but there is a significant gap between the middle candle and the other two candles, making it a rare yet powerful pattern.Morning Star Candlestick Pattern
The Morning Star candlestick pattern is a triple candle formation that occurs in three phases of the market: first, a bearish candle indicative of a downtrend; second, an indecisive candle, often a doji or a small-bodied candle; and third, a bullish candle that signifies buyers gaining command over the price. Unlike the Bullish Abandoned Baby candlestick pattern, it is not necessary for there to be a significant gap between the middle indecisive candlestick and its neighboring candles. The absence of a gap implies that the shift in market sentiment from bearish to bullish occurred gradually, reflecting a gradual decrease in selling pressure and cautious entry of buyers into the market.
Bullish Abandoned Baby Candlestick Pattern
The Bullish Abandoned Baby is a bearish trend reversal candlestick pattern, distinguished by the presence of a gap that the Morning Star pattern lacks. The positional formation of the candles in the Bullish Abandoned Baby is quite similar to that of the Morning Star, but the gaps before and after the middle candle—often a doji or a near-doji formation—differentiate these two patterns.
The gap between the middle and neighboring candles signifies abrupt changes in market sentiment. The difference between the first bearish candlestick and the middle candle indicates that selling pressure was significantly stronger during that session, creating a gap followed by a pause and aggressive buying from bulls. This gap conveys a sense of urgency, leading traders to interpret the formation of this pattern as more decisive and reliable compared to the Morning Star, especially when confirmed by high trading volume.
Need to Know
The Morning Star Candlestick Pattern is a trend reversal pattern that typically forms at the bottom of a downtrend. It consists of a triple candle formation, each representing different scenarios in the market. The first candle is part of the downtrend, characterized by a bearish nature that indicates seller dominance during that period. This is followed by the occurrence of an indecisive candle, which signifies a pause in the current selling pressure. Finally, the formation of a bullish candlestick, without any gaps before or after the middle candle, signals that bulls have entered the market with the same intensity that sellers had when exiting.The Morning Star pattern carries its own psychological implications and characteristics. Certain conditions can enhance the effectiveness of this pattern, while there are also circumstances in which it may fail. Traders should be familiar with these factors before capitalizing on the candlestick pattern. Additionally, the Morning Star exhibits similarities and differences with the Bullish Abandoned Baby candlestick pattern, which is also a bearish trend reversal pattern.
Frequently Asked Questions
1. Can the Morning Star Candlestick Pattern be effective on shorter time frames?
- Yes, the Morning Star candlestick pattern can be effective on shorter time frames; however, its accuracy tends to decrease as the time frame shortens due to increased market noise. This can be mitigated by seeking volume confirmation and additional indicators.
How does the Morning Star Candlestick Pattern behave in highly volatile market conditions?
- In volatile market conditions, the reliability of the Morning Star pattern can be impacted due to erratic price movements. To maintain its effectiveness in such scenarios, it is essential to use this pattern in conjunction with multiple confirmations from other technical indicators.
Are there specific technical indicators that improve the accuracy of the Morning Star Candlestick Pattern?
- Yes, certain indicators such as the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Moving Averages can enhance the accuracy of the Morning Star pattern when used in combination.
What should a trader or investor do if they find insufficient volume on the third candle contributing to the formation of the Morning Star pattern?
- If the third candle of the Morning Star pattern lacks sufficient volume, traders or investors should wait for additional confirmation from other technical indicators to ensure that the reversal has enough strength to be sustained.
