Japanese candlesticks are dominant charting methods in the world of finance. As a result, many candlestick patterns have been discovered by traders and analysts. Chart patterns and candlestick patterns are highly important for traders who rely on technical analysis. Evening Star is a very popular candlestick pattern that offers a great risk to reward ratio. Let’s find out exactly what Evening Star means and how to trade it in Forex.
Evening Star definition
Evening Star is a candlestick pattern that appears in an uptrend and signals reversal. Evening Star consists of three candles. The first candle follows the trend and is bullish. The second candle is smaller in size and can be either bullish or bearish. The third candle is bearish.
Why is understanding the Evening Star important for traders?
- Understanding Evening Star in trading can help traders better spot reversals.
- Evening Star is a widely used candlestick pattern in technical analysis.
- The Evening Star candlestick pattern offers great risk to reward ratios to traders.
- Understanding Evening Star in trading can help you better manage trades. For instance, if you are in a long position and see the pattern forming, you might exit the position or use a trailing stop since the pattern signals reversal.
Thorough Evening Star Explanation
Evening star is a candlestick pattern that appears in a bull market. The second candle shows that bulls are running out of energy. The third candle indicates that bears are taking the initiative.
Traders can open short positions after the third candle closes and not before. You should always wait for a pattern completion. Stop Loss should be positioned above the Evening Star. While the profit target depends on the strengths of the newly established trend, it’s usually larger than Stop Loss.
Keep in mind that candlestick patterns work best in larger time frames. 1 minute, 5 minute or even 30 minute candle patterns can be unreliable due to market noise. It’s recommended to use the Evening Star on higher than 1 hour candle time frames.
Example of Evening Star in Forex
Now let’s take a look at the Evening Star example in Forex. You can see Euro vs US Dollar below. Uptrend was followed by the Evening Star pattern. In order to properly trade this pattern, traders could enter the trade after the third candle closed in the short direction. Stop Loss target is right above the Evening Star and profit can be claimed by using trailing stops, trendlines, trend indicators or other methods.
FAQs on Evening Star in Trading
What is Evening Star?
Evening Star is a candlestick pattern that is actively used by financial traders in technical analysis. The pattern appears in uptrends and consists of three candles. The first candle is bullish, the second candle can be either bullish or bearish but has a smaller size than the first one. The third candle is bearish. The pattern signals upcoming price reversal.
How to trade Evening Star?
In order to trade the Evening Star pattern the right way, you should always wait for the pattern to complete. The pattern is considered to be fully formed after the third candle closes. Traders can enter the market short afterwards and place stop loss orders right above the pattern. Profit target depends on how strong the new trend is. Some people wait for a confirmation candle to form and do not jump into a trade right away. Confirmation candles make predicting trade direction easier, but they increase stop loss targets and decrease profit potentials.
How accurate is Evening Star?
The Evening Star pattern is considered to be a reliable pattern. What’s more, the pattern offers a great risk to reward ratio to traders. However, be noted that chart patterns are not always good at predicting future prices and it’s important to manage your risks by choosing the right trade sizes. You should never risk more per trade than you can afford to lose.