Evening star pattern

An evening star is the morning star's mirror at the top, and it's made of three candles. The first is a long bullish candle. The second has a small body and sits around the first one's high; that's the star. The third is a long bearish candle that gives back at least half of the first candle's body.

The story runs in order again. First buyers are in control and carry price higher with ease. Then the small candle arrives: the rally has stalled and both sides hesitate. Finally sellers step in and wipe out most of the first candle's gain.

If the middle candle is a doji, it's called an evening doji star. Whatever the variant, an evening star isn't a sell signal on its own. It means something when it forms at the end of a rally and at a clear level.

Measure each candle. On a 4-hour EURUSD chart, say the first candle opens at 1.0850 and closes at 1.0896: a bullish candle with a 46-pip body. The second opens at 1.0898, rises to 1.0914, dips to 1.0892 and closes at 1.0901: a 3-pip body. The third opens at 1.0899 and closes at 1.0862: a bearish candle with a 37-pip body.

Now check the rule. The midpoint of the first candle's body is 1.0873. The third candle closed at 1.0862, below that midpoint. A long bullish candle, a small star at the top, and a bearish candle giving back more than half of the first body: all three conditions hold. That's an evening star.

Don't look for the textbook gap on forex charts. The market trades around the clock, so intraday candles rarely leave gaps. There, a small-bodied star sitting at the high is usually accepted as enough.

Then look at the location. Does the star's high line up with resistance, a previous high or the top of a range? The logical stop sits a little above the pattern's highest point, the star's high. With the high at 1.0914, the stop goes near 1.0917. Selling the third candle's close at 1.0862 means 55 pips of risk; that distance is your 1R.

Selling before the third candle closes. A long bullish candle followed by a small one at the top is half a pattern. The third candle can open lower, recover into the close and end up as little more than a wick. An evening star only exists once the third candle closes strong.

Forgetting the location. If price has been chopping in a tight range for weeks, it's easy to find a three-candle sequence in the middle of it. There's no defended high and no tiring rally there. Even if the pattern looks right, what it says is weak.

Putting the stop on the third candle's high. Many traders tuck the stop just above the bearish candle's open to shorten the distance. But the sell idea fails when the star's high is taken out, not before. If price throws a wick up in between, you're stopped while the idea is still valid. If the distance is long, shrink the position and leave the stop where it belongs.

In the middle of a strong uptrend, an evening star that touches no resistance is usually the start of a pullback, not the end of the trend. If the higher timeframe keeps printing higher lows, the third candle's drop may do little more than hand buyers a better price.

Sequences around major data releases mislead too. A sharp news-driven bearish candle can look like the pattern's third candle. But what moves price there is the release, not the structure, and the move can reverse within minutes.

If price closes above the star's high, the pattern is void. Check the room below as well. If the third candle closed just above strong support, there isn't much space to fall. A 55-pip stop against a first obstacle 25 pips away is under 1R before the trade starts.