If you are a regular trader in stock markets, then you might not have missed those red and green candlesticks. They have now become the lingua franca of trading. In some charts, instead of red and green, we see white and black candles. Technically, the color of these candles hardly matters other than for our psychology as we tend to associate red with a fall in the market and green with a rise. Let us examine candlesticks a bit in detail.
What are candlesticks?
Candlesticks represent the visual movement of stocks with red and green colors. Red as the name implies, shows a falling stock and green a rising stock. By analyzing the pattern of candlesticks, a trader can make inferences about price movements. Though they originate in Japan, they are used in almost all trading platforms across the globe to understand trends for successful trading
A candlestick has 4 parts – Open, high, low, and close price of the stock. The body of the candle is the trading range of the stock within a specific time. The green candle reflects buying and red reflects selling. Empty candle shows open and close, being the same or buyers and sellers the same.
Patterns in Candlestick Trading
There are different patterns in candlestick trading like the morning star candlestick pattern and evening star candlestick pattern. Bull flag pattern are shown by a series of green candles and bearish by red. When both appear consecutively, it shows the movement of the stock. It should be noted that candlestick patterns show only the probability of price movements and are not a guarantee. Then what is their use? They help you to understand clearly when to enter or exit a market to trade profitably.
How do you understand an Evening Star candlestick pattern?
The appearance of an evening star pattern in a candlestick chart points out the possibility of the trend reversal from bullish to bearish. How do you understand it? When we see a pattern made of 3 candles with
- First, Green or white candlestick with a large body
- Middle, a small reddish or greenish body
- End, a red or black candlestick which closes below half of the first candle
Then we can infer it is an evening star pattern.
Inference of Evening Star pattern
Unlike the morning star candlestick pattern, this reflects the possibility of an upcoming fall in stock price. The first candle shows the significant presence of buyers, the second small candle shows weakening momentum and the last one shows the possible downtrend coming in price.
When the candlesticks of an Evening Star pattern are combined, we see a Shooting Star candlestick pattern. The greater the depth of candles in the evening star pattern, the greater the possibility of the trend reversal.
What makes Evening star different?
It is the appearance of the second candle where buyers and sellers are equally strong that the gains are erased.
Patterns in Evening Star
- If the middle candle has a long red body, it shows the rejection of buying trends by bears.
- If the middle candlestick has a gap, then it is referred to as an abandoned Baby candlestick pattern. The bullish abandoned baby shows a reversal of a downtrend and vice versa with a bearish one.
Using Evening Star pattern for Options Trading
As it indicates an early warning signal of an upcoming bullish trend reversal from up to down, it can be used to decide safe entry points, when combined with other technical analysis indicators like the following:
Resistance:- Analyse a 5-minute candlestick chart with an expiration time of 5 minutes. If an evening star pattern is appearing at the resistance zone, it is time to open a DOWN Option. Resistance shows the hesitancy to go up and when you have an evening star pattern in it, it shows sellers are dominating and hence it is time to short.
Stochastic indicator:-Analyse a 5-minute candlestick chart with an expiration time of 15 minutes. If an Evening Star pattern is present at the overbought line of this indicator, then it is time to open a DOWN option. The appearance of the Evening Star candlestick pattern signals a trend reversal and at the same instant, the Stochastic indicator points down and the blue line crosses the red line from above.
Benefits of the Evening Star
- High accuracy when appearing at the end of an uptrend.
- Gets high-accuracy entry points when combined with other technical analysis indicators
- Focusing on the second candle shows the weakening rising trends
- It is not advisable to use reversal candlestick patterns in a market with sideways movement.
- Never trade binary options within a shorter period and the minimum expiration time should be 5 minutes.
Though evening star is just a possibility of price movements, use it reasonably by analyzing it with others to draw proper interpretations to trade successfully.