Evening star candlestick pattern: a comprehensive guide to identification and trading

If you were holding the stock, how would you have known it was time to exit? And if you weren’t, how could you have spotted the chance to short? The answer is evening star trading – a strategy built around the evening star candlestick pattern, a signal that bullish momentum is fading and sellers are taking control.

The evening star pattern is a bearish reversal signal, which shows when bullish momentum is becoming weaker, and sellers are stepping more strongly into the market.

Let’s try to understand the pattern and how to correctly identify it. Like any other candlestick pattern, the evening star provides an ‘actionable signal’. Whatever asset you’re trading, this pattern tells you when you may want to exit long positions or when to consider entering short trades in case you did not have exposure to that asset.

Like any other pattern, there can be false signals too. So, it’s a good idea to wait for confirmation before rushing in to place trades or exit positions. Past performance is not a reliable indicator of future results.

More details on the evening star chart pattern

The evening star is a three-candle pattern that forms at the end of an uptrend. Its message is simple: buyers are losing momentum and sellers are stepping in with conviction. It shows three phases of the market. First is the trend exhaustion, which means that the price rally is on but is waning. Then comes the indecision phase, where there is a pull and push between buyers and sellers. Finally, the bearish takeover occurs - sellers start dominating.

How the evening star candlestick pattern appears on a chart

The evening star consists of three candles. The first is a green candle with a large body. This means there is still strong buying pressure. Then comes a candle with a small body. This is called a doji or spinning top. The small body shows there is indecision in the market. The colour of the candle is not relevant – it can be green or red. Only the size of the candle is relevant here. The third candle is a long red one. It opens near or below the second candle and closes deep into the body of the first candle or at least halfway into the body of the first candle. This means selling pressure has overcome buying pressure.

What does the evening star chart pattern really show? The first candle indicates that buyers are driving prices higher. The second one shows that optimism is cooling. The third candle means sellers are seizing control, shifting sentiment sharply lower.

Additional factors to consider

For informed trading, the evening star needs to be identified correctly. The first thing to check is volume. This is probably the most crucial factor. A marked increase in trading volume on the third candle (strong bearish candle) shows that there are enough sellers trying to push down prices. It means there is a higher chance of selling pressure sustaining. It is not just a blip, but may be an actual reversal. Without a corresponding increase in volume, the pattern may be less reliable.

The next factor that impacts this pattern is the timeframe of the chart on which it appears. The evening star pattern is considered more dependable on longer timeframes, such as daily or weekly charts. On shorter, intraday charts, market noise can lead to false signals, making the pattern less reliable.

Finally, the trend requirement is a fundamental condition for the pattern's validity. The pattern must appear after a sustained uptrend or rally to be considered an evening star. If the pattern forms in a sideways or ranging market, its reversal signal is not valid. Identifying the pattern's appearance at key levels like resistance zones or overbought zones further strengthens its signal. Ignoring the broader market context and failing to confirm the existing trend is a common mistake that traders should avoid.

Conditions for the evening star pattern

Here's a quick view of the conditions that need to be met for evening star trading. The first candle must be a long bullish one and should appear during an uptrend. The second candle needs to be much smaller (doji or spinning top). The third candle must close within the first candle’s body. Plus, volume should be enough to support the reversal. Volume being higher on the third (bearish) candle is an even better condition.

Context also makes a difference in how effective the evening star is. The pattern is most powerful when it occurs when prices have been rising for some time. It is also considered a strong signal when it appears at key resistance zones, near long-term moving averages or at overbought levels.

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Don’t back the wrong horse

There are some mistakes that most traders make. Learning these can help you avoid them and reduce your risk. The first is trading the evening star when the market is moving in a range (sideways). There is no real rally before the pattern forms.

The next is trading any sequence of three candles as the evening star without thoroughly checking conditions. Another mistake to avoid is ignoring the need for confirmation by using indicators or volume.

Trading the evening star candlestick pattern

Recognising the pattern is one thing but it is also important to know how to trade the evening star. There are some strategies that you may follow. These evening star trading strategies include well-defined entry points, stop-loss positions, and take-profit targets.

Entry strategies: there are two main strategies if you want to go short after seeing the formation of the evening star pattern - aggressive and conservative.

An aggressive entry is when you enter a short position just after the third candle closes. If you follow this, you have the chance to make the most gains (if the market moves in the direction you expected). Usually, the initial downward move is quite steep, which offers a great opportunity. But remember, this also means taking on higher risk of a false signal. Prices may suddenly reverse and continue the bull run.

A conservative entry needs you to wait for confirmation before opening a short position. You may wait for the price to break below a key support level or for a bearish moving average crossover, like a 50-period EMA crossing below a 200-period EMA. While this approach may result in missing a small portion of the initial move, it reduces the risk of prices not continuing to decline. Essentially, this means you’re waiting for the market to confirm the bearish reversal.

Stop-loss placement: proper stop-loss placement is important to help protect your capital. The goal is to open a stop-loss at a level that cancels the bearish signal if the price moves against you. However, standard stop-loss orders are not guaranteed, and guaranteed stop-loss orders incur a fee when activated.

You can do this by putting the stop-loss just above the high of the second candle in the pattern. This gives you a tight risk-reward ratio. It is most suitable for experienced and aggressive traders. If the price moves above this point, it suggests the reversal is failing, and the uptrend may be resuming. A slightly safer way is to place the stop-loss above the high of the first candle. While this stop gives your trade some breathing space, it can lead to a larger loss if the market does not move the way you expected it to.

Take-profit strategies: you have put in so much effort to learn trading and recognise the evening star. You don’t want to predict correctly and still not make your desired profit. Setting a take-profit order might help you book profits in good time. There are many methods that can be used. A simple way is to target the closest strong support level. This may be a previous swing low or a price where previously there was buying interest.

You can also use Fibonacci retracement levels. Common targets include the 38.2% or 61.8% retracement of the preceding uptrend. These levels can be areas where the price finds support.

Trading the evening star pattern using confirmation tools

While the evening star is a powerful pattern, it’s a good idea to trade it only after combining it with other technical indicators.

Relative strength index (RSI): look for readings above 70, indicating that the asset is overbought and due for a correction. A bearish divergence, where the price makes a new high, but the RSI makes a lower high, is an even stronger confirmation.

Moving average convergence divergence (MACD): a bearish MACD crossover, where the MACD line crosses below the signal line, provides additional confirmation of a shift in momentum from bullish to bearish.

Bollinger Bands®: if the Evening Star pattern forms outside the upper Bollinger Band®, it suggests the price has extended too far and is likely to revert to the mean, a strong signal for a reversal.

The most crucial confirmation tool is volume. A significant spike in volume on the third bearish candle of the pattern provides strong evidence that a large number of sellers have entered the market, validating the reversal. However, while volume may suggest a reversal, false signals may occur, and it doesn’t guarantee that a trade will be profitable.

Comparing evening star with some other candlestick patterns

Here’s a look at how the evening star compares with other popular candlestick patterns.

Morning star is a close cousin of the evening star pattern. They get their names metaphorically. Don’t you typically feel more positive in the morning? The morning star is a bullish reversal signal, suggesting growing optimism in the market. During the evening, we know that night is not too far away. That’s why the evening star is a bearish reversal signal, suggesting growing pessimism in the market.

Morning star appears at the bottom of a downtrend and signals a shift in sentiment from bearish to bullish.

Hanging man is a single-candle bearish signal versus three candles of the evening star. This is the reason that the hanging man is considered less strong as a signal than the evening star.

Bearish engulfing is based on two candles. In this, one candle completely ‘engulfs’ the previous candle, showing dominance.

Real chart examples

Imagine a large-cap stock, like Microsoft or Apple, rallying for several weeks, reaching resistance near a previous high. The daily chart shows the evening star and there is confirmation with volume and other technical indicators. Traders typically short with stops above the doji and target previous support, capturing a 15% correction.

While trading forex, you see EUR/USD on a weekly chart showing an evening star at 1.1200 and this coincides with a Fibonacci retracement. Volume spikes on the bearish candle. You may decide to short with a stop-loss above 1.1250 and target at 1.1000.

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Advantages and disadvantages of the evening star

Advantages are:

• Clear and strong reversal signal.
• Works across multiple asset classes.
• Easy to recognise visually.

Disadvantages are:

• Requires confirmation to avoid the signal failing.
• Prone to false signals in sideways markets.
• Can be confused with similar patterns.

Advanced tips to improve accuracy

• Use RSI or MACD divergence at the top, as this increases reliability of the signal
• Trendline confirmation: a break of an ascending trendline after the pattern adds to its reliability
• Short EMA crossing below long EMA confirms the bearish shift
• Evening star on daily chart can be confirmed on 4-hour chart to boost accuracy
• Daily and weekly charts offer the most reliability, while intraday trading with evening star requires extra caution

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