By Steve Warshaw – Evening start patterns occur at the top of an existing uptrend, and are extremely reliable. You can identify this Japanese Candlestick Pattern using the following rules:
1. The inbound trend must be strongly bullish. I would recommend using a 20 day and 50 day moving average system for determining the inbound trend. Ideally, the 20 day MA would be above the 50 day MA, and the 20 day MA would always be rising.
2. The first canldstick should close above the open, with a long real body, and minimal shadows. This is a bullish, white candlestick.
3. The second candle gaps above the close of the first candle. It is ok for this candle to be white, or black. It should also have a small real body, or even be a Doji.
4. The third candlestick should gap lower then the second days candle close, but above the first candlestick’s close.
5. the third candlestick must be black (bearish), and close below the mid-line of the first day’s candlestick.
6. The bottom shadow on day three should be very short or non existant
Validating the pattern
There are several tools you can use to validate this pattern. Volume is a key indicator for validation. On the first day, volume should be relatively light in comparison to the strength of the move. Volume should be much stronger than the 30 day moving average of volume on day 2, and on day 3.
Second, the size of the first and third day’s candlesticks are said to be an indicator of the strength of the reversal. Extremely long real bodies indicate a strong reversal pattern with strong momentum to the downside.
Third, if the second candle is a doji, the more significant the toping action
Fourth, if price is approaching old resistance, or a significant fibonacci retracement level, the more significant the topping action.
Technical Indicators
Since Evening Star patterns are reversal patterns, traders should look for divergences in momentum indicators such as the MACD, or 3 / 10 oscialltor. A volatility indicator, such as the On Balance True Range indicator should show increased volatilty. Finally, a volume based indicator be sideways to descening as price rises.
Performance
The overall performance of the evening star pattern is very impressive, in fact, it is the fourth best performing canldestick pattern overall according to Thomas Bulkowsi’s Encyclodpedia of Candlestick Charts.
Reliability
The evening star pattern was validated as a reversal pattern in a whopping 72% of all instances, ranking it 10th out of 103 different patterns.
Trading notes:
Some traders prefer to wait for confirmation of the reversal pattern by waiting for a breakout below the low of the third day’s candle. Typically the evening star pattern is reliable enough not to wait for this confirmation. The resulting down trend tends to be very stable, so waiting for confirmation won’t effect the bottom line of trading this pattern greatly.
About the Author
Evening star candlestick patterns are very reliable indicators of a bearish reversal in trend. Learn how to setup a stock screen for this incredibly reliable japanese candlestick pattern
