Technical analysis as we know it today changed dramatically. Personal computers are responsible for it.
However, some patterns stand the test of time. No matter the market and the changes in execution, some patterns survived. Japanese candlestick techniques are such patterns.
Before discussing one of the most popular Japanese patterns, it is worth mentioning that, mostly, they are reversal ones.
As such, they form at the end of a trend. Either a bullish or a bearish trend, at the end of it, the market will form some sort of a Japanese reversal.
The Japanese candlestick patterns are made of a single candle or a group of candles. Their power is proportional with the time frame they appear on.
Stars are powerful reversal patterns. The bigger the time frame they appear on, the more powerful the signal is.
Trading Forex with Morning and Evening Stars
A star is a group of three candles. The name of the star comes from its implied future direction.
Having said that, a morning star is a bullish pattern. Hence, it forms at the end of a bearish trend. Remember? It shows a reversal.
On the other hand, an evening star is a bearish pattern. It appears at the end of a bullish trend and shows weakness.
However, both morning and evening stars will have a difficult time to reverse a trend. Typically, after a Japanese reversal, the ones that trade in the direction of the underlying trend will try to take the highs (in an evening star) or the lows (in a morning one).
This happens from time to time. But it doesn’t mean traders should disregard the patterns.
The secret is to integrate the morning and evening stars trading with a proper risk-reward ratio. It means at least 2 or 2.5 for every pip risked.
In doing that, discipline takes control over the trading process. As a result, Forex traders have more chances to survive in the long run.
How to Trade a Morning or an Evening Star
As mentioned earlier, the pattern has three candles. The first one is a strong candle in the direction of the original trend. It has a strong green body (in an evening star) or a strong red one (in a morning star) and a very short shadow.
The candle in the middle is either a hammer or a doji. In both cases, it shows reversal conditions. Or, at least hesitation.
The last candle moves in the opposite direction when compared to the original trend. It has a strong body, at least like the first candle has.
Above there’s an evening star that respects all the rules described. There’s a strong, bullish trend, and at the end of it, a group of three candles that form the evening star.
The market reaction speaks for itself. Unfortunately, look at the time frame. It is the hourly chart.
As such, chances for the pattern to survive are slim. Moreover, there’s no retracement after the third candle.
Typically, traders look for bulls to put up a stiff fight and retrace at least fifty percent of the pattern. That’s a great place to go short. However, this pattern here lacks that retracement.
Yet, the market retraced and, for the hourly time frame, it still offers a nice risk-reward ratio.
Japanese candlestick techniques are great reversal patterns. They work great, especially on the bigger time frames.
But the secret comes not from one’s ability to spot them. There are clear rules for that.
The key is to integrate the patterns in a strong money management system. That’s the only way to profitable Forex trading.