The Evening Star: another great forex trend reversal and continuation pattern…
Forex Evening Star
SIGNAL: Bearish, Strong to Medium
The Evening Star pattern consists of three individual forex candles:
Setup Candle: The first candle is bullish and preferably occurs at the end of a significant push up in price.
Signal Candle: the second candle is a small indecision candle, i.e. a small real body on a doji or spinning top candle that signifies an even contest between the bulls and the bears. It can be either bullish or bearish.
Confirmation Candle: the third candle is a decidedly bearish candle that closes below the low of the signal candle.
PSYCHOLOGY AND FUNDAMENTALS
The Evening Star pattern sets up at the end of a move up in price, whether that move is part of a long-term trend or a short term retracement. The two scenarios are:
- When it occurs at the end of a long run up in price it signals the exhaustion of the supply of buyers and the drawing in to the market of sellers. At this stage sellers will be more inclined to enter the market on the offer of a currency pair at comparatively elevated levels. At the close of the signal candle the bull/bear struggle is left undecided. It takes the confirmation candle’s close below the low of the signal candle to confirm that the bears are once more in control.
- The Evening Star candlestick pattern can also occur in an downtrend when price temporarily retraces, perhaps and certainly preferably, to a resistance level. This temporary move upwards may be due to sellers taking profit, buyers moving into the market at the relatively cheap prices, or just normal cyclical market exhaustion as the sell orders thin out. Hence, if price suddenly and sharply moves up to a level where sellers are ready to once more start moving into the market, price may be pushed down again.
TRADE ENTRY & STOP LOSS
You can enter either a Sell Stop order 2 to 5 pips in front of the lowest price the confirmation candle reached, or if you are confident enough of the move down you can enter aggressively with an At Market order. Either way, your Stop should go 2 to 5 pips behind the highest price of the setup and signal candles. This is a rough guide only: in volatile markets you may choose to extend the stop further out, and for much higher timeframe charts such as the daily you may set stops 5 to 20 or even more pips behind the highest price of the setup and signal candles.
The larger the bearish candle that confirms the pattern, the more likely price will move down. However, if the confirmation candle is extremely long you may have trouble getting in with a reasonable reward to risk ratio.
For example, you may have to set a stoploss of 50 pips to set the stop comfortably behind the highs of the setup and signal candles. If there is a strong area of support only 20 pips below current price action, you may consider this to be a low probability trade and pass on the opportunity.
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