Morning Star Candlestick Pattern: Definition & Example in Trading
A Morning Star formation is one of the common candlestick combinations in trading. It’s a combo of three sticks that generally look like this:
- A long red (bearish) candlestick indicating a very deep price downturn
- A short red or green (either bearish or bullish) candlestick with a long wick signifying that the drop has slowed down and the price is coming back up
- A long green (bullish) candlestick indicating a sudden price upturn
This three-step movement is the Morning Star. The secret behind using it to your advantage and gain is to predict whether one is going to form or not in the coming sessions.
What does Morning Star mean?
It is important to note that the MS does not always form exactly like described above – it’s not a regularly occurring thing. The parameters can change, but what’s crucial is the meaning that a Morning Star has for the market.
A Morning Star can be pictured as a sort of horseshoe with a wide base. The prices are falling steadily, then the drop slows down and the trend is turned in a completely different direction. Most of the time, it happens when the volume of the asset in question is currently low. As a result, the demand rises and so does the price.
Typically, the volume rises significantly on the third day (when the bullish trend starts to mount) and the upward trend generally survives for some time, even if price growth can decrease or reverse slightly on the fourth day.
The name may be derived from the position of the middle candlestick, which is usually positioned very low and near the ‘bottom’ of the price charts. Given its small size and location, the middle candlestick looks like a small standalone speck located near the ‘horizon’. From the artistic point of view, it looks like a low star.
How does Morning Star come to be?
It’s not always sensible to expect the Morning Star pattern to happen whenever the asset volume starts to decrease. This formation represents a sudden desire of the market to balance out the uncontrolled downward trend that leads to overselling of security.
But it doesn’t always happen. Sometimes low prices and depleted volume lead to stagnation in the market. Low volume is not the only parameter that you need to use if you want to predict the trend overturn following the Morning Star formation.
How to predict the Morning Star
There are several important parameters to keep an eye on. First of all, you’ll need to watch the traded volume both on the first and the second day. You don’t actually need to take exact numbers, average numbers and calculate whether the volume has reduced significantly enough. There is naturally an index ready to help you out.
The index in question is called a Relative Strength Index (RSI). RSI takes into account the sales from the previous sessions and estimates the current volume from 0 to 100. You can think of it as an asset popularity scale. If the scale is filled more than 2/3, it means the stock is overvalued. If the scale is filled less than 1/3, it’s undervalued.
So, whenever you see a <30 on the scale, you know that the current volume is much lower than usual, compared to the recent sales.
Identifying whether the asset is nearing the support zone is an equally crucial goal. The support zone acts as a kind of floor for the asset price. The chaotic market rules prevent the price to fall much lower than this – the market always tries to reverse the trend and push the price back. This is pretty much what happens when the Morning Star appears.
Identifying the support zone may be tricky. When the price is relatively stable and changes trends regularly, but always staying in the same price intervals – the support zone would be on the minimal price. However, understanding and identifying the zone in more complex circumstances requires more studying.
So, to sum it up – in order to identify the Morning Star you need to:
- Make sure the volume is low (below 30 on the RSI scale)
- Make sure the price is nearing the support zone.
Identifying this pattern is actually fairly easy, the evidence being the Star itself. Whenever the second day is confirmed to be a part of the pattern, traders rush to buy the stock at a higher price exactly because they expect the trend to continue rising.
It’s something of a regular thing, really. Many people anticipate it to happen. Even so, the pattern can go horribly wrong if interpreted incorrectly. You always need to make sure the Star is going to form.
Morning Star Doji
The Morning Star Doji pattern type is a bit rarer combination of the usual Star, but with the shorter wicks. Wicks symbolize the change between the opening and the closing prices, as you know. So, naturally, the shorter wicks mean the price change has slowed down even further.
This movement can only lead to a surge in price and volume (given, of course, that all the requirements for the Star to appear are met). So, the traders always keep an eye for a Doji star – it’s a sure way to hop onto the coming bullish trend.