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About the Morning Star Pattern and using it in Online Trading

About the Morning Star Pattern and using it in Online Trading

The Morning Star is a candlestick chart pattern that’s useful in helping you spot a potential reversal in a price downtrend. The goal in doing so is to set you up to open a buy deal on your security just as the upturn gets going. Therefore, it’s important to identify your signal fairly swiftly, but it’s equally important not to misidentify your chart pattern as a Morning Star when it’s really something else. As we’ll see, there are certain ways you can get confirmation that what you’re seeing on your chart is indeed a Morning Star, and these involve looking at other sorts of indicators.

Remember, though, that you will never receive a 100% definite buy signal from your chart patterns, no matter how many indicators point in the same direction. The reason is that, unlike prophets, chart patterns do not have the power to tell us what will happen in the future. What they do show is that, in the past, when situations like these have arisen, certain outcomes tended to follow with relatively high frequency. That outcome may not manifest today, however, either because today is an exception to the rule, or because the unique details of today’s circumstances will determine otherwise.

By way of comparison, you might have reason to believe your toddler will stop screaming in the grocery store when you hand him a chocolate. After all, he has reacted that way many times in the past. However, every parent knows that there are all kinds of things about today’s circumstances that make them unique and could lead to a surprise. Perhaps the boy is lacking sleep today, or maybe he was bullied in school. To take his past behaviour as a sure guideline for the future could be a ticket for trouble. A more realistic approach would be to remember the boy’s past conduct in similar situations and use them selectively in order to deal with the present. In this article, we aim to help you along in the process of doing just that – not with toddlers, but tradable instruments.

Spotting a Morning Star Candlestick Pattern

Meet the Morning Star.

As you see in the image above, the Morning Star candlestick pattern consists of three consecutive candlesticks, with the middle one standing out below as the shortest of the three. In our picture, that candle is coloured green, but it could also appear as red, or even as nothing but a single horizontal line, (indicating prices closed at the same point they opened for the session) which we would call a doji. If your candlestick chart looks something like the above, you could have a Morning Star on your hands, but let’s start by explaining what the pattern means.

Candle number one, which is long and red, represents the fact that, during that trading session, prices for the security were driven quite a bit lower than the starting price. There was, as usual, a tug-of-war between buyers and seller but, overall, the sellers pulled considerably harder than the buyers, and this drove prices down from the top of candle number one to its bottom.

In the session following this one, it’s clear that the bears are not wielding the same power as they did the day before. The sellers are not able to keep driving prices downward because the buyers are standing up for themselves today. If candle number two is green, as it is in our picture, prices even ended up higher than they started for the session. The point is that buying pressure increased dramatically in session number two. We still don’t possess any hints about future activity, though, because the bulls may just be putting in a last-ditch effort before laying down their arms completely. It could turn out that, after this period of consolidation, the bears step in again to dominate with all the more confidence.

Behold, however, that candle three turns out to be long and green, which means the bulls were really the ones who had the most conviction. In session three, the buyers got sweet revenge and drove prices more than half the way up the level of candle number one. Now, our suspicion is confirmed that there will be a reversal of the overall downward trend, and that prices will keep rising after session number three. Near the end of candle number three would be the place to open your buy deal.

Is Your Morning Star Pattern Genuine?

Now comes the part where you check the veracity of your chart pattern. For starters, it can only be a Morning Star if it appears during a downturn in prices, so check that that is the case. Now, even if it does show up in a downturn, we’re going to need some way of confirming that trading sentiment is really changing from bearish to bullish. Check to see if candle number two is hovering in a known support zone – an area where we might expect prices to stop moving lower. In order to do this, you could consult Fibonacci retracements or moving averages. If it turns out to be a support zone, you have an added reason to believe the downward trajectory of prices will stop and reverse.

After this, take note if a gap separates candle number two from its peer on the left, and also from its peer on the right. A gap between candle one and candle two indicates the power of the sellers; a gap between candle two and candle three indicates the tide has turned and the power lies with the bulls. If you can see both of these gaps on your chart, it means your Morning Star is looking even more genuine.

Now, gauge candle three against candle one. You are assessing how much of the downward movement represented by candle one has been made up by candle three’s bullish rise. The more substantially candle three compensates for the price drop of candle one, the stronger your buy signal is appearing.

Don’t stop there: Consult a volume indicator to find out how trading volume varied over the course of the three trading sessions. If you see a steady increase, with day three recording the highest volume of all, you have further confirmation. This shows there may be bullish energy building up behind the scenes.

Finally, make use of a momentum indicator to find out if prices are changing more quickly than they normally do. The MACD and RSI indicators are designed to give you this information. Again, a positive result will confirm your Morning Star pattern. If you have found that more than one of the above confirmations has worked out for you, with special significance given to volume and momentum indicators, you have a strong basis to open a buy deal near the close of candle three.

 

Special Considerations to Morning Star Patterns

When doing the homework on your Morning Star candlestick as per the above, don’t forget that you are tracking the trajectory of, not numbers or lines on a chart, but human beings’ emotions. The checklist we have mentioned is really just a series of methods of assessing how strongly the overall sentiment of traders on this instrument has flipped around from bearish to bullish. This is quite a subtle thing to measure, and we normally don’t get clear, unequivocal answers on it. After all, we are dealing with a disparate group of people sitting in front of computers in locations all over the globe, and some of them may remain bearish to the bitter end. However, there is a certain point at which most bears will give up the battle and join the bulls, simply because they know what’s good for them. If prices look set to shoot up, you’ll only hurt yourself by living in the past and pretending they’re still going down. This is the switch in mood that the Morning Star pattern is telling us to watch out for.

Think of yourself, then, as a private investigator gathering evidence of this shift in the dominant trading sentiment, not as a laboratory assistant marking off items on a checklist. The central question on your mind is not “What’s going to happen to prices?”, but “What sentiment is going to be guiding prices?” Therefore, open your mind to other factors influencing people’s trading decisions like, for instance, news events of the moment.

 

Signing Off

You can gain valuable practice in trading the Morning Star candlestick pattern, and without any financial risk, through using iFOREX’s free demo account. This is designed to help you bring your trading knowledge from the realm of the theoretical to the practical. As with the acquisition of any new skill, the more time you spend practicing, the more quickly you are likely to see progress. You can also consult iFOREX’s Education Centre to brush up on technical points whenever you need.

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