In the obscure world of technical analysis, candlestick theory can often feel like the most daunting. And it’s no wonder! With so many eccentric names, it can be easy to get lost in all the jargon. However, this article is about to put an end to your confusion by breaking down one of my favourite bearish reversal indicators: the evening star pattern.
Along the way, we’ll look at it’s definition, how to identify it with state-of-the-art software, ideal trading setups, and other commonly asked questions.
So let’s get into it…
What is an Evening Star Candlestick Pattern?
The evening star candlestick pattern is a three-candle sequence that tends to be a bearish indicator.
As such, it usually appears at the end of an uptrend and beginning of a downtrend. Therefore, traders use it to either sell an existing long position or enter a new short position.
However, as with everything in technical analysis, this is not a given. Evening stars produce “false signals” just like all other technical indicators, so it is vital to incorporate other tools into your analysis. This article will show you exactly how to do that.
How to Spot an Evening Star Pattern
As mentioned, the evening star pattern consists of 3 candles that usually appear towards the end of an uptrend.
- The first candle is a long bullish candle that represents a buying climax.
- The second candlestick has a small body, signaling indecision about the trend. This body can either be bullish or bearish, however its open must be higher than the first candle’s close.
- Lastly, the third candle resembles a large bearish candle that signals an upcoming downward trend.
Luckily, there are charting platforms that automate this process for you these days. For example, TrendSpider has a great candlestick recognition feature that has the ability to display more than 200 candlestick patterns on any chart.
Simply select the candlestick patterns you want to see from the drop-down menu at the top of your chart and watch them magically appear before you.
In this case, I have chosen the evening star, which are shown in the shaded regions with an “es” label above them.
Hopefully you should be able to see the structure outlined above.
In particular, each evening star begins with a large bullish candle, followed by a small-bodied (bullish or bearish) second candle, before ending with a large bearish candle.
Notice how the second candle is bullish in the first and third examples, but bearish in the second example. This distinguishes it from a closely related pattern, the evening doji star, which I will explain later.
As mentioned, whether the second candle is bullish or bearish doesn’t matter. The important thing is that it opens above the close of the first candle in all cases.
Another observation worth bearing in mind is that the third candle closes below the midpoint of the first candle in all 3 cases. Most traders only consider it a true evening star when this happens. Ultimately, the larger this bearish candle is, the more confident we can be in a subsequent downtrend.
Note, TradingView is another great platform for candlestick recognition.
How to Trade the Evening Star Pattern
It should go without saying that you should never rely on one technical indicator to make a trading decision.
The evening star is no exception.
With this in mind, there are a few ways that you can increase your chances of making money from this pattern.
Let’s start by looking at an ideal entry setup.
Entry
- Since the evening star works best as a bearish reversal indicator, you ideally want it to occur after an uptrend.
- It’s an added bonus if it also coincides with a resistance level, as this increases the probability of the uptrend coming to an end.
- You should also use other technical indicators to confirm whether bearish momentum exists, like an overbought RSI (above 70), declining volume, or a falling MACD.
The chart of Tesla below shows what this looks like in action. Unfortunately, the share price was at all-time highs at this point, so there weren’t any resistance levels to reference. However, there were plenty of other red flags apparent.
Firstly, you will notice that the evening star occurs after a long uptrend. So long in fact, that the RSI became overbought – a sign of bullish exhaustion. Moreover, the RSI began to fall before the share price did – another bearish signal known as negative divergence.
At the same time, volume was declining below its longer-term average, which is a bearish phenomenon known as weak relative volume.
Lastly, you had a bearish MACD crossover, which was the final nail in the coffin for the uptrend.
You should wait for the third candle to close before entering your trade, just to confirm that the evening star pattern is in fact complete. Once you have done so, you can now look to enter a short position at the opening of the next candle.
You should also place a stop loss at the high of the second candle to protect yourself from significant losses.
Exit
While certain chart formations – like the inverse cup and handle pattern – have precise methods for calculating a profit target, the evening star is not one of those patterns. Instead, it relies on a combination of different technical indicators and discretion on your part.
Here are a few guidelines to help build a sensible exit strategy:
- Take profits at areas of support on the chart
- Utilize other technical indicators like the RSI or MACD to confirm when bearish momentum fades
Continuing with our example of Tesla, I have highlighted what an ideal exit level might look like based on these criteria.
The first thing to note is how the circled “Buy/Cover” region occurs at a Fibonacci support level. Not only that, but there is also an oversold RSI and bullish MACD crossover around the same level. Combined, these 3 signals would have given you a profitable exit from your initial short position.
Difference Between Evening Star and Morning Star Pattern
A closely related candlestick pattern to the evening star is the morning star pattern.
While both consist of three candles and indicate potential trend reversals, they usually occur at different points in a trend.
As we’ve already established, the evening star candlestick pattern usually occurs at the end of an uptrend and signals a potential bearish trend reversal (though not always!). It starts with a long bullish candlestick, followed by a short candlestick, and ends with a long bearish candle.
Conversely, the morning star pattern usually appears at the end of a downtrend and represents a bullish reversal pattern. It starts with a long bearish candle, followed by a small-bodied (bullish or bearish) candlestick, and ends with a long bullish candle.
In this respect, the morning star is a mirror image of the evening star, and conveys the opposite about expected price action.
As you can see in the chart of Google below, the evening star and morning star patterns marked the beginning and end of the same downtrend, respectively – both living up to their names!
Difference Between Evening Star and Evening Doji Star Pattern
Another closely related candle pattern to the evening star is the evening doji star.
Both the evening star and evening doji star tend to appear at the end of an uptrend and signal a potential bearish trend reversal. In addition, they both start with a large bullish candlestick and end with a large bearish candlestick.
However, their difference lies in the second candlestick. In particular, while the evening star has a small-bodied candle that can either be bullish or bearish, the evening doji star has a doji candle in the middle. A doji candle doesn’t have a body as the opening and closing prices are virtually the same.
FAQs
Is the Evening Star Pattern a Bearish Reversal Pattern?
Yes, the evening star pattern is generally seen as a bearish reversal pattern when it appears after an uptrend.
What’s the Difference Between a Shooting Star and Evening Star?
The shooting star and evening star patterns both occur on an uptrend and signal a potential bearish reversal. However, the difference is that a shooting star refers to a single candlestick with a long upper shadow and small lower body, whereas the evening star is a three-candlestick pattern.
That doesn’t mean that a shooting star can’t appear within an evening star. In fact, if the second candle in an evening star is a shooting star, then it only adds credibility to the bearish reversal.
A shooting star is otherwise known as a bearish pin bar, which you can read more about in this pin bar vs hammer article.
What is the Success Rate of the Evening Star Pattern?
Bulkowski’s Pattern Site states that the evening star has a 71% accuracy in forecasting bearish reversals, with a 57% chance of hitting its price target. Therefore, traders should not rely solely on this candlestick pattern for trading signals.