Stock Chart Trading: The Evening Star

How do you trade when you see the Evening Star pattern?

Before this, we have spoken of the Morning Star chart pattern, and unlike its morning-bullish counterpart, this chart is a bearish trend indicator.

Before we start, if you have absolutely no idea how the price charts work in trading (stocks, forex, etc.), check out our article below!

Stock Chart Basics for Beginners

We’ll also make it clear that these patterns are identified throughout the many repetitive occurrences — for example, this one right here is a bearish pattern, which tells you that the price might move down, so there are many instances where the price moves down after this pattern forms. Is it guaranteed? Sadly, no. In fact, there is no guaranteed way of identifying when exactly the price is going to go up or down.

Then how do traders make money? They can’t guarantee anything as much as you and I, what traders do is that they try to make the best guess possible by maximizing their chances of success. How to maximize your chance of success? By trying to look at other indicators apart from just looking at one single pattern to place your buy and sell.

For example, if this pattern appears just as the trend touches the resistance line, you might have another indicator supporting the guess of the price going down. What is a support line? Read it here. The higher the likeliness will be if you have more indicators supporting the same sentiment.

Characteristics of The Evening Star

Here’s how you can identify if the pattern is an Evening Star:

It appears in an uptrend.
The first day’s (D1) candlestick is a green candlestick which also formed the new high for that uptrend.
The second day’s (D2) opens higher than D1’s closing price, and it forms a Doji candlestick or a Spinning Top candlestick — it doesn’t matter if it’s green or red.
The third day’s (D3) candlestick is a long red candlestick — it doesn’t matter how low it goes, but it is usually advisable for you to look for a red candle that opens with a gap down from D2.

What does the Evening Star tell you?

Here’s what the pattern formation tells you:

It appears in an uptrend, so the buying sentiment is strong, and the price is bullish (moving upwards) because many people are buying.
The D1 opens and closes at a new high, which shows the buying sentiment was still good.
The D2 candle, however, forms a Doji /Spinning Top, which shows that the market is indecisive — it can go either way, but people who own a lot of the assets are starting to get nervous.
D3 shows the price is falling down dramatically, which means the bullish rally is ‘out of gas’ and they just decided to sell whatever it is they have while they still can, and this would usually cause more panic, and people keep on selling until the price starts to fall, and a bearish market (downtrend) kicks in.

How to trade?

For a bearish pattern, there are generally two activities that people would do — either selling whatever stake they have to make a profit (which is called “make profit”), or initiate a short sell. In these two activities, there are two ways to do it, risky and risk-averse.

Note: Personally, the idea of shorting or selling on D4 is not quite practiced, since D3’s red candle itself is actually considered a confirmation of the direction after D2’s indecisiveness.

Risky

If you are short selling, you can start short selling on D3 itself when it’s near the market closing time (around 4:30 pm) once you can confirm that the pattern will likely form.
If you’re making profit, you can sell your stakes on the fourth day (D4), once you can confirm that D4 will likely be a red candle.
If you’re short selling, the stop loss can be put at whichever point is the highest within the 3 days (including the candlesticks’ upper tail).

Risk-averse

If you are short selling, you can initiate it on the fourth day (D4), once you can confirm that D4 will likely be a red candle.
If you’re making profit, you can sell your stake on D3 itself near to the market closing once you can confirm that the pattern will likely form.
If you’re short selling, the stop loss can be put at whichever point is the highest within the 3 days (including the candlesticks’ upper tail).

Bottom line

The Evening Star is a bearish pattern that indicates the price may go down.
It appears at the top of an uptrend, which is then followed by indecisiveness (doji or spinning top), which is then followed by a red candle that draws people’s sentiment down.
Essentially, it tells you “Look! The price moves down after people contemplated.”
A risky trader can start shorting on D3 itself, and they can also sell their stakes on D4, once they can confirm that D4 will likely be a red candle.
A risk-averse trader can start shorting on D4, or they can also sell their stakes on D3 itself.
Use other indicators and analysis as well to get a proper overview of what’s going on — it will help you make more informed decisions.

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None of the material above or on our website is to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument. Investors should carefully consider if the security and/or product is suitable for them in view of their entire investment portfolio. All investing involves risks, including the possible loss of money invested, and past performance does not guarantee future performance.

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