Morning Star Pattern holds an important place in technical analysis. Morning Star Pattern is a reversal pattern and a bullish candlestick patterns. It forms after a sharp decline in stock prices or stock markets.
Morning Star is a term which indicates light after darkness. After the ‘darkness’ of price fall ends, there is light, means prices are likely to rise in coming days.
The name of this pattern is inspired from the planet Mercury in our solar system. Mercury is known as a Morning Star.
Formation of Morning Star Pattern
Morning Star Pattern forms after a significant price fall. It is a three Candlestick Pattern. You would need to see the fourth Green Candlestick of follow up buying as a confirmation signal of expected stock price rise.
The Morning Star Pattern starts forming after we see a big bearish Red Candlestick indicating significant sell off in the markets.
Next trading day, prices open lower with a gap from the previous day closing price. After completing its trading range for the day, the prices again close lower than the previous day closing.
That day of trading may make a Green or Red Candlestick. The colour of the candlestick is not of much significance although Green Candlestick is more favourable. This Candlestick is a small Body Candlestick with Shadows on both sides. This tells us that some buying is emerging at lower levels although sellers are also equally strong.
On third day of trading, the prices open higher with a gap from the previous day closing. Buyers or the Bulls take control and the sellers or the Bears start giving up. In the end, the price gives day closing significantly higher making a big Green Candlestick. The closing may be almost near the opening price of first day of trading.
This completes the Morning Star Pattern. If follow up buying continues the next trading day or the 4th trading day, the Pattern gets confirmed. Otherwise the Pattern may be a false signal. See a failed pattern in below image where there was no follow up buying on 4th day of trading.
Gaps we mentioned are very important for the Pattern to be more favourable. There should be gap on both sides of the second trading day Candlestick.
Trading The Morning Star Pattern
When the pattern is confirmed, the trader may find opportunities to create long positions or start buying. The prices are expected to move higher towards higher Resistance levels.
The lowest price touched by the stock or the markets in Morning Star Pattern becomes your stop loss for the trade. Keep your stop loss just below that price level.
Keep your risk reward ratio favourable while taking this trade. Start buying near the dupport or the stop loss. Don’t just jump into the trade at any available price. Wait for the prices to come down to go long. Markets give opportunities to buy at lower level.