The pattern forms following a downtrend in price and is the opposite of evening star candlestick pattern. Crypto traders or stock analysts usually look for a morning star to place their bids at a lower price and profit from the situation.
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What Does a Morning Star Tell You?
A morning star is not an indicator and is a visual pattern, meaning you don’t have to do any calculations to identify the trend reversal. However, combined with indicators such as the Relative Strength Index (RSI), a trader can have a clear picture of the market situation.
The pattern tells you about the end of the downtrend for the underlying asset. If the price of a stock, asset, or crypto was falling for some time, the formation of the candle shows an end to the trend. It signals an uptrend in chart patterns and consists of three candlesticks, with the middle candlestick representing a star.
Analyzing the Pattern
Since the formation is visual, it doesn’t take any technicalities to spot the morning star pattern. The pattern includes a very long bearish candle as the first sign of downtrend reversal. The long candle is usually larger than the previous candles and signals the formation of the pattern. The second candle in the pattern is smaller than the previous one and can be bullish, bearish, or neutral. It is also essential to remember that the second candle is separated from the real body of the previous candlestick. The third candle is bullish and is usually of the same height as the first candle. Generally, a trader also needs to consider volume during candlestick formation, making up the pattern, with the third day experiencing the highest volume. High trading volume is often seen as a confirmation of the pattern followed by positive price action.
Morning Star Pattern Targets
The star signals the weakness of bears and suggests that the sellers cannot push the price to a lower low. The third candle signals retracement, and the indecisive market sentiments of traders push price upwards. The morning star candlestick pattern can be useful for people who prefer day trading or short-term trades.
The trading strategy can be applied to every asset or commodity, having strong liquidity. Below is an example of Litecoin featuring morning star candlestick formation. You can place targets at previous resistance or area of consolidation. Also, do not forget to use stop loss below the recent swing low, as a break of this price range would invalidate the reversal.
Limitations of the Morning Star Chart Pattern
Trading entirely on visual patterns is usually risky since they show a standalone performance of an asset. To minimize the risk, it is advisable to use the morning star pattern together with indicators such as On Balance Volume (OBV) and Stoch RSI. Otherwise, it might be a norm for novice traders to experience a morning star whenever there is a small indecisive candle during a downtrend.
Trading a morning star pattern and applying this strategy for Bitcoin trading is one of the easiest ways to make profits. The strategy is simple to learn, and any novice trader can understand the signals on its basis. However, trading purely on visual patterns without the help of indicators can be risky. Hence, a morning star candlestick strategy works best with other support levels and volume indicators.