Therefore, we have a Japanese candlestick pattern that warns of a situation where price changes may occur. In this way, what it indicates is that they were going down and are going to start going up. It is similar to other patterns like the bullish engulfing, but more reliable.
In trading investment patterns are very relevant. If the investor takes long (buy) or short (sell) positions and can know when the trend will change, he will be able to make a profit. Of course, it is not that simple and we should rely on other indicators.
Operation of the morning star pattern (trading)
If we look at the image we will see the most relevant aspects of the morning star pattern (trading). It starts with a bear market, where prices are declining, meaning there is selling pressure. Then, a more intense buying spree begins, forcing prices higher.
Keep learning economics, finance and investment
Learn from scratch to improve your finances and investments, or specialize in the most in-demand areas of financial work: investing, stocks, savings, asset management, banking, business analysis, and accounting. All courses in a single subscription.
Now you can watch the first episode of each course for free:
As in any other investment pattern, we are facing a possible change in trend and we must take it into account. Also, it is not advisable to base our analysis only on figures such as morning star (trading) and use other indicators such as the moving average.
Characteristics of the morning star pattern (trading)
Let’s look at some of the characteristics of these Japanese candlesticks.
- First of all, we always start from a bear market. In it, the selling pressure causes prices to fall.
- Next, we have a bearish candle and one that can be bullish or bearish, with a small body and whose opening or closing price is below that of the previous one.
- Finally, we have another large candle that should be bullish or bearish if the previous smaller one was.
- The candle in the middle of the pattern indicates a period of calm in the markets where the buying and selling forces are balanced.
- If the body of the small candlestick is non-existent, it is known as a doji and the pattern would be morning doji star.
Trade this pattern
Let’s finally see how to trade this pattern.
- First of all, it would be advisable to enter when the top breaks and do it with a stop order or wait to see if the confirmation close occurs.
- The stop loss is very important. The most common is to place it below the candle with a small body and with a reasonable margin.
- Lastly, in the morning star (trading) pattern, we exit on a discretionary basis or expect some resistance.