Page 13 of the handbook, three candles
Morning Star
- Signal
- Bullish reversal
- Candles
- 3
- Best found
- At the bottom of a pullback or downtrend
What has to be true
- Candle 1 is bearish
- Candle 2 has a small body, bullish or bearish (often a hammer)
- Candle 3 is bullish
The morning star is such an interesting candlestick pattern, because it requires a total of 3 candles to form, but often has single candle patterns baked into it, such as a hammer as candle 2.
It consists of three candles: the first one is a bearish candlestick, the second one can be bullish or bearish with a small body, and the third one is a bullish candle.
Trading this pattern can be done in a variety of ways, and can be extremely lucrative:
- Combining our prior knowledge of the strength of the hammer, we can enter at the close of day 2, in anticipation of the bullish day 3 to complete the morning star.
- Wait until day 3 to see the gap up for the confirmation of a morning star. Use candlestick patterns on smaller, intraday time frames to find an optimal entry.
From the daily to the 5 minute
Start by first examining the daily timeframe. Imagine day 2 has just closed and day 3 has not started yet, as this is when we will be planning a trade on day 3 of the morning star. We can all now easily recognize day 2 as a hammer, but also that it's a hammer after retracing and holding the 61.8% fibonacci level.
On day 3, we can focus on intraday timeframes to see how price interacts with the previous day levels (PDH, PDC, etc.) to not only find the most optimal entry, but to add confidence. On the 5 minute chart, price formed a one white soldier pattern while reclaiming the PDH and PDC levels.
One more morning star
Below is just one more example of the morning star reversal.