The article was written by John Williams of forexbrokershub.com, a resource where he publishes in-depth reviews of retail Forex brokers.
Technical analysis is a fascinating field and traders all over the world try to predict future price movements based on either past prices or by interpreting repetitive structures price makes, namely, patterns.
The Western approach to technical analysis comes with all kinds of patterns, form continuation (pennants, flags, etc.,) to reversal (head and shoulders, double tops/bottoms, etc.,) but the very notion of continuation and reversal is being treated by Japanese candlestick techniques.
Under this approach, there are also reversal and continuation patterns price make but the decision and the confirmation comes from studying candles and the shape of a candle or group of candles, not a whole price structure.
A candle is formed out of a real body (that can be red or green, meaning bearish or bullish candle) and a shadow (that can be upper or lower, depending on where it is formed). The image below shows what a candle is and its elements.
Under the reversal patterns candlesticks offer, one important group is represented by stars. A star if formed by a small real body candle that can be red or green, and this candle should “gap” away from the real body of the preceding candle.
Morning and evening stars are strong reversal patterns and they are being formed out of three candles. In the case of a morning star, the first candle is a strong red, bearish candle, with a big real body and this one is being followed the the star, the one candle described in the previous paragraph that should gap a bit from the previous candle’s real body. The third candle of a morning star should be a strong bullish or green candle and it shows that bulls are taking control. The image below depicts such a pattern on the eurusd four hours chart.
The opposite of a morning star is the evening star and this reversal pattern, like the name suggests, is a bearish one, and comes after a strong bullish trend. The evening star is formed out of three candles as well, but this time the first candle has a strong bullish or green body, followed by the star (which can have a red or green real body, it doesn’t really matter) and the last candle is characterized by a strong red or bearish candle. This last candle shows bears are taking control over the market. The image below shows an evening star on the daily eurusd chart.
There are a couple of clues or hints one should use when looking at a possible morning or evening star and interpreting the pattern is strong enough or not. For example, if the third candle closes deeply into the territory of the first candle’s real body this should be interpreted as the pattern being pretty strong.
Also, if the very first candle that comes after the pattern is completed tries to break the highs/lows establish by the evening/morning star and the pattern still holds, this might be interpreted as a confirmation/validation of the star or of the fact that the previous trend finished.
As a general rule, but this is being valid both on regular technical analysis and Japanese candlesticks, the higher the time frame a pattern appears, the powerful the outcome should be.
Japanese candlestick charting techniques offer traders the possibility to implement new strategies when trading and offer a visible and clear sign about what the current situation in the markets is.