Morning Star Pattern: What Is It and How To Trade It?

What Is the Morning Star Pattern? 

The Morning Star pattern is a classic bullish reversal pattern in technical analysis.

Traders use this pattern to indicate that a bearish market will see an uptrend movement, also known as a reversal to a bullish market. 

• Bearish Market: A market condition where prices are falling and are expected to keep declining. So, a “bearish candle” (red or dark blue) would signal prices decreasing. 

• Bullish Market: The opposite of a bearish market, where prices are rising and are expected to continue increasing. So, a “bullish candle” (green or white) would signal prices increasing.

How to Identify a Morning Star on Forex Charts 

The morning star in forex is a triple candlestick pattern consisting of three candlesticks.

To spot a Morning Star candlestick formation on forex trading charts, look for these specific characteristics:

• First Candle: A long, bearish candle indicating significant selling pressure.

• Second Candle: A small-bodied candle (either bullish or bearish) showing indecision in the market.

• Third Candle: A long bullish candle signaling a shift in momentum towards buying.

The second candle's body should be below the first candle’s close, and the third candle should close at least halfway up the first candle's body.

The Morning Star pattern appears on charts after a downtrend, signaling a potential uptrend.

Morning Star Pattern vs. Doji Morning Star Pattern

While the standard Morning Star has a small-bodied second candle, the Doji Morning Star candlestick pattern features a Doji candle as the second candle. 

A Doji candlestick looks like a cross, inverted cross, or plus sign. It is characterized by having little to no real body and occurs when the open and close prices are virtually the same.

A Doji indicates even more indecision in the market and can sometimes signal a stronger potential reversal since it shows a greater struggle between buyers and sellers.

Morning Star Pattern vs. Evening Star Pattern

The Evening Star pattern is the bearish equivalent to the Morning Star. It signals a potential downward reversal and consists of:

1. First Candle: A long bullish candle, as opposed to the bearish candle of the Morning Star.

2. Second Candle: A small-bodied candle, indicating market indecision.

3. Third Candle: A long, bearish candle, as opposed to the bullish candle of the Morning Star.

While the Morning Star pattern indicates a shift from bearish to bullish, the Evening Star suggests a shift from bullish to bearish.

How to Trade the Morning Star Candlestick Pattern 

To effectively trade the morning star pattern, you must first identify it following the directions above. Then, you have to confirm the pattern by using other indicators.

While the Morning Star pattern is reliable, it can still produce false signals, especially in choppy or trendless markets. 

Therefore, confirming with other indicators reduces the risk of entering trades based on false signals.

Once you’ve identified and confirmed the Morning Star pattern, it’s time to enter the trade. Typically, traders enter a long position at the close of the third candle or the opening of the next candle. This approach helps you ride the upward momentum as it starts to generate profit.

However, risk management is key in trading. So, set a stop-loss order below the low of the second candle. If the market reverses and the price drops below this point, you’ll limit your losses.

Lastly, determine your profit target and monitor your trade if you need to adjust your strategy in light of new market conditions.

How to Set Profit Targets for the Morning Star Pattern?

When trading the Morning Star pattern, setting a clear profit target is essential to determining when to exit the trade and preventing overambitious decisions. 

To establish an effective profit target, start by identifying potential resistance levels on the chart.

Use the highest point of the pattern — typically the high of the third candle — as an initial benchmark. If this high aligns with a significant resistance level, it may be suitable for a profit target. 

How to Set Stop Loss for the Morning Star Pattern

Knowing how to set the right stop loss is essential in morning star trading. 

The simplest way is to set your stop loss just below the low of the Morning Star pattern. 

This point is usually formed by the second candle, which is a small-bodied candle (like a doji or a spinning top).

There are also other methods:

• Fixed Percentage or Dollar Amount: Set your stop loss based on a fixed percentage or dollar amount of your capital, like 1% or 2%. Calculate how much price movement equals this amount to limit your risk.

• Trailing Stop Loss: Use a trailing stop loss to adjust your stop loss as the trade moves in your favor. Move it to break even once the price has gained a certain distance, or trail it below each higher low to lock in profits while allowing for growth.

• Time-Based Stop Loss: For short-term trades, exit if the price doesn’t move in your favor within a set number of candles or sessions. This frees up capital from underperforming trades.

What Indicator Is Best to Trade with Morning Star Pattern?

Choosing the right indicator to complement the Morning Star pattern can significantly enhance your trading strategy.

While there's no one-size-fits-all answer, here are a few worth considering:

Relative Strength Index (RSI)

Imagine RSI (Relative Strength Index) as your market mood ring. It measures the speed and change of price movements, indicating when a currency pair is overbought or oversold. 

When RSI dips below 30, it suggests that the market is oversold, which aligns nicely with the potential reversal signaled by the Morning Star pattern.

Moving Average Convergence Divergence (MACD)

MACD (Moving Average Convergence Divergence) is like your market trend detective. It compares two moving averages to identify changes in momentum, giving you insights into whether a trend is gaining or losing strength. 

A bullish crossover (where the MACD line crosses above the signal line) confirms the upward momentum indicated by the Morning Star pattern, adding conviction to your trade.

Bollinger Bands

Think of Bollinger Bands as your market boundaries. They consist of a simple moving average and two standard deviations above and below it, forming a channel representing potential price extremes. 

When the price touches or crosses the lower band and coincides with a Morning Star pattern, it suggests that the market is oversold and ripe for a reversal.

Benefits of the Morning Star Pattern

• Early Reversal Signal: Indicates a potential bullish reversal, helping traders enter at the start of an uptrend.

• Clear Entry Point: Provides a defined entry point with the appearance of a distinct three-candle pattern.

• Effective in Market Analysis: Useful for identifying market bottoms and forecasting price recoveries.

• Combines Well with Other Indicators: Can be used alongside technical indicators like moving averages to confirm trade setups.

Limitations of the Morning Star Pattern 

The limitations of the morning star pattern include:

• False Signals: There are instances where the morning star pattern may produce false signals, leading you to enter positions prematurely.

• Depends on Market Conditions: The effectiveness of the Morning Star pattern can vary depending on market conditions and volatility.

• Needs Confirmation: The Morning Star pattern needs to be confirmed with additional indicators for its validity.

• Depends on Timeframe: While the morning star pattern can be reliable on longer timeframes like daily or weekly charts, it may be less reliable on shorter intraday timeframes due to increased noise and fluctuations.

Conclusion 

The Morning Star pattern is a valuable tool for identifying potential bullish reversals. By combining it with other indicators, you can make more informed decisions.

However, like all trading strategies, it’s crucial to recognize its limitations and use it as part of a broader trading strategy.