@

Chart Patterns: Evening Star

The evening star is the name for a classic bearish pattern appearing in candlestick charts that signals the end of a price uptrend and the beginnings of a downtrend.

The pattern appears at the climax of a trend as a cross-like star formation. It's often used to identify a selling opportunity upon a reversal or help traders prepare for further selling opportunities as a new bearish trend gains momentum.

Candle Formations: Seeing The Light

To identify an evening star on a chart, it's important to recall how candlestick chart formations are interpreted.

The candlestick formation, which traces its origins back to Japanese rice trading charts of the 19th century, is composed of a body and two wicks. The candle formations are usually color-coded, with red indicating a declining price and another color, often blue or green, indicating a rising price. The square or rectangular-shaped bodies of the candles on the chart, also known as the "real bodies," indicate the difference between the opening and closing prices of the period being charted.

When the asset is gaining value, the bottom of the candle body represents the opening price, and the top represents the closing price. When the asset is losing value, the top of the candle body represents the opening price, and the bottom represents the closing price. The lines extending above and below the body are known as the "wicks," and represent the high and low prices for the trading period represented by the candle body.

Traders like to use this type of chart because they can compare opening and closing prices at a glance. They can also see how much others are willing to pay at highs and lows in such a way that they can get a quick feeling for the trend of prices during each trading period.

Your Lucky Star

Once you learn how to interpret the information shown by a candlestick, it can be used to glean signals showing where the market may go next. To detect the evening star pattern, traders will want to look at the candlesticks forming at the top of an uptrend.

The evening star pattern can be identified by observing the three candlesticks at the top of the trend.

The first is a bullish signal, where the close is higher than the open, while the second candlestick is even higher. This time, however, it appears in a cross-like, or near-cross like, formation that is the bearish evening star signaling a coming downturn. The flat "real body" of the evening star, where the closing price is near the open, is understood as an indication that the market has lost conviction in the continued upward movement of the trend.

There is often a vertical gap between the body of the first candle and the star. The evening star candle is frequently a bullish candle formation such as an inverted hammer candle, but the direction of the star is not critical, and a bearish candle can also serve as a star signal.

The third candle to look for is the confirmation candle that comes after the appearance of the evening star. The open of this candle is typically aligned with the close of the star candle, but its body instead thrusts downward beyond the body of the star. Once this candle appears, traders can be assured the evening star pattern has been completed and that the market is in a reversal toward a move downward.

How To Trade When Evening Star Appears

Once the evening star pattern emerges, traders may want to use it as a signal to put in a sell order. This could be particularly useful ahead of a news announcement, because the star indicates the market will lack conviction to continue its trend upward. Traders who want to assume less risk, however, may want to wait and use the star as a signal to plan for entry into the market selling on a subsequent move downward. This is because the initial reversal can be followed by a breakout to a still lower trading range.

Summary

Searching for an evening star pattern on a candlestick chart can be an easy way to detect a downward reversal and bearish momentum without resorting to a complex toolbox of other technical indicators. However, traders first want to practice observing candlestick patterns to gain confidence interpreting the signals that appear on the chart. Once comfortable doing so, they should begin scanning the upward trends on charts for their lucky star that will act as a signal to take profits or sell short for a profitable move downward.

Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. Friedberg Direct will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

Disclosure

Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided on an "as-is" basis, as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. Although this commentary is not produced by an independent source, Friedberg Direct, FXCM or its affiliates takes all sufficient steps to eliminate or prevent any conflicts of interests arising out of the production and dissemination of this communication. The employees of Friedberg Direct and FXCM commit to acting in the clients' best interests and represent their views without misleading, deceiving, or otherwise impairing the clients' ability to make informed investment decisions. For more information about the Friedberg Direct's internal organizational and administrative arrangements for the prevention of conflicts, please refer to the Firms' Managing Conflicts Policy. Please ensure that you read and understand our Full Disclaimer and Liability provision concerning the foregoing Information, which can be accessed here.**

Order Execution Only

Order Execution Only

Regulatory Documents:
IIROC Brochure: How Can I Get My Money Back, How IIROC Protects Investors, IIROC Complaints Brochure, CIPF Brochure, CIPF Coverage Policy

The relationship between Friedberg Direct and FXCM was formed with the purpose to allow Canadian residents access to FXCM's suite of products, while maintaining their accounts with a regulated Canadian firm. All accounts are opened by and held with Friedberg Direct, a division of Friedberg Mercantile Group Ltd., a member of the Investment Industry Regulatory Organization of Canada (IIROC). Friedberg customer accounts are protected by the Canadian Investor Protection Fund within specified limits. A brochure describing the nature and limits of coverage is available upon request or at www.cipf.ca.