Candlestick trading is a fascinating branch of technical analysis, whereby traders look for “patterns” in candle formations for clues about the underlying trend. One of these candlestick patterns is the morning doji star, which is a three-candlestick pattern often seen as a bullish reversal indicator.
Throughout this article, we are going to dig into what the morning doji star pattern is and how it can help traders with their trading decisions.
What is a Morning Doji Star Pattern?
The morning doji star candlestick pattern is a three-candlestick sequence that signals a potential bullish trend reversal in a security.
As such, it usually appears at the end of a downtrend and marks the beginning of a new uptrend.
Importantly, the middle candlestick (second candle) must be a doji candle, which is a rare situation when the opening and closing prices are the same. As an aside, a four-price doji is an even rarer occurrence where the open, close, high, and low are the same.
Traders interpret this as a moment of indecision in the market, as neither buyers nor sellers are in control of the trend at that moment.
Hence, the doji represents a potential inflection point between the balance of buyers and sellers and an imminent trend reversal. As a side note, a double doji represents and even stronger moment of indecision and a greater chance of a trend reversal.
How to Spot a Morning Doji Star Pattern
Spotting a morning doji star pattern is relatively simple, as it consists of three distinct candlesticks.
- It starts with a long bearish candlestick, which signals the peak in selling pressure.
- This is followed by a doji candlestick that opens below the first candle’s body. A doji indicates indecision in the market as neither buyers nor sellers are in control.
- Finally, it ends with a long bullish candlestick that closes above the midpoint of the first candle. This confirms the beginning of a new uptrend.
Instead of relying on the human eye to detect a morning doji star, many traders utilize a candlestick recognition screener like MetaStock or TrendSpider. These are pieces of software that automatically find candlestick formations, so you don’t waste time flicking across thousands of charts.
TC2000 is also capable of candlestick recognition, however you will have to program the screens yourself using their Personal Criteria Formulas. Finviz also has a great free candlestick pattern recognition screener, however it doesn’t include the morning doji star.
How to Trade a Morning Doji Star
There are generally 3 steps you need to take when trading the morning doji star:
- Confirm the pattern
- Set a stop loss
- Set a profit target
Confirming the Pattern
To confirm the pattern, you should integrate other technical indicators into your analysis, like support and resistance levels, volume, moving averages, MACD, and RSI.
In general, a strong bullish setup would see the pattern occur at a support zone, have increasing volume throughout the 3 sessions, and display other bullish technical indicators, such as:
- Moving average breakout
- MACD crossover
- Oversold RSI with bullish divergence
As you can see in the chart below, quite a few of these conditions were met.
Firstly, you can see increasing volume from one day to the next in the bottom window. Above that, you have an oversold RSI with bullish divergence, which is a popular bullish reversal signal in its own right. In the main chart, the fourth candle breaks above the 10-day moving average, which provides further confirmation of bullish momentum. Lastly, the top window shows a bullish MACD crossover that occurs on the fifth candle.
As this example shows, trading the morning doji star requires waiting for the three-candle pattern to complete and using other technical indicators to confirm the reversal.
Therefore, entering a long position on either the fourth or fifth candle would have been a sensible trading strategy here.
While it’s true that prices dipped straight after, they wouldn’t have triggered most stop-loss levels. In the next section, I will show you where most traders set their stop losses for a morning doji star pattern.
Setting a Stop Loss
Why do we need to set stop-loss levels in the first place? Well, because even when everything seems in our favour, nothing is guaranteed in markets. Therefore, stop losses provide protection in the event that the reversal fails. This is otherwise known as a “false signal”.
For a morning doji star, traders usually set their stop-loss at the low of the doji candle.
As you can see in the chart below, this stop-loss was triggered by the fourth candle – immediately after the morning doji star.
This example also highlights the importance of using other technical analysis tools. If we look more closely, we can see the following conditions in place:
- MACD sell signal
- Price crossing below 10-day moving average
- RSI falling from overbought levels
- Declining volume
All of these are red flags that suggest we are closer to the end of an uptrend, as opposed to a downtrend.
Hopefully, these would have prevented us from taking a long position in the first place, however it’s nice to know that the stop-loss was there as a safety net.
Setting a Profit Target
Ideally, a stop-loss won’t be necessary and our only concern will be where to take profits.
There is no precise calculation for this with a morning doji star, so traders generally set their profit targets at a previous resistance level.
Let me illustrate this with the following example…
The first thing to notice about the chart below, is that the morning doji star occurred at a support level. As mentioned earlier, this gives extra credibility to the reversal signal.
However, the point I really want to make is how the resistance level at the top of the trading range provided the perfect exit opportunity.
Remember the chart of Mastercard from earlier?
Well, here it is again with a suggested profit target this time. Not only does this occur at a resistance level, but it also coincides with prices breaking below the 10-day moving average and a MACD sell signal.
Again, this highlights the point that trading requires a multi-angle approach to make informed decisions.
Morning Star Pattern
A closely related candlestick pattern to the morning doji star is the regular morning star pattern.
As with the morning doji star, a morning star candlestick pattern is a three-candlestick formation that usually appears towards the end of a downtrend.
Likewise, it also signals that downward momentum is slowing and a bullish reversal may be imminent.
The formation starts with a long bearish candlestick, followed by a second small candlestick, and ends with a long bullish candlestick. Importantly, the second candlestick can be either bullish or bearish, but not a doji.
For a more robust confirmation of the pattern, traders also look for the third candlestick to gap up from the close of the second candlestick and close above the middle of the opening candlestick.
Finally, just like any other technical analysis tool, using the morning star candlestick pattern in conjunction other technical indicators will yield better trading results.
Difference Between Morning Doji Star and Morning Star Candlestick Pattern
As you can probably tell, the morning doji star and morning star share many things in common. Indeed, they both tend to appear at the end of a downtrend, start with a long bullish candle, and end with a long bearish candle.
However, there is one small detail that distinguishes them. And it all lies in the second candlestick.
In particular, while the morning doji star has a doji candlestick in the middle, the morning star pattern has a small-bodied candle of any colour (bullish or bearish).
Difference Between Morning Doji Star and Evening Doji Star
Another closely related candlestick pattern to the morning doji star is the evening doji star.
While both of these doji candlestick patterns are composed of three candles with a doji in the middle, the evening doji star usually appears at the end of an uptrend, whereas the morning doji star usually appears at the end of a downtrend.
Therefore, the evening doji star is a bearish reversal pattern as opposed to a bullish reversal pattern.
As you can see in the chart below, the evening doji star marked the end of an uptrend and the beginning of a new downtrend.
The evening doji star begins in an uptrend with a long bullish candlestick, followed by a doji, and closes with a bearish candlestick. In contrast, the morning doji star opens with a long bearish candlestick, followed by a doji, and ends with a long bullish third candle.
Both of these candlestick patterns feature a doji candle in the middle, which indicates indecision in the market. In other words, neither the bull nor the bears are in control of the trend.
FAQs
Is the Morning Doji Star a Bullish Reversal Pattern?
Yes, the morning doji star candlestick pattern is considered a bullish reversal pattern in technical analysis, as it occurs during a downtrend and indicates that bears have lost control of the market and that the bulls may be taking over.
How Can Traders Use the Morning Doji Star?
Traders can use the morning doji star pattern to identify potential bullish reversal patterns in the market. However, it is important to use the pattern in conjunction with other technical analysis indicators and risk management tools to make an informed trading decision.
What is an Evening Doji Star Pattern?
An evening doji star pattern is a pattern made of three candles that can show a change in a stock price trend. In particular, it is a bearish pattern that signals the end of an uptrend.
The middle candlestick in this pattern is a doji, which means its opening and closing prices are the same, indicating indecision in the market.