What is a Morning Star?
- A bullish three period candlestick formation that consists of…
- a long red candle followed by…
- a small red or green candle (or doji) that gaps below the close of the previous candle followed by…
- a long green candle (stronger signal if gaps up)
- A leading short-term reversal indicator
Why is a Morning Star important?
- The red candlestick confirms that the downtrend remains intact and bears dominate.
- When the second candlestick gaps down, it provides further evidence of selling pressure.
- The small candlestick indicates indecision and a possible reversal of trend. If the small candlestick is a doji, the chances of a reversal increase (referred to as morning doji star).
- The third long green candlestick provides bullish confirmation of the reversal.
So how do I use it?
Since morning stars are signals of a potential bullish reversal after a downtrend they are helpful in confirming a significant bottom especially when found near support. They are most useful in stop-loss placement with stops typically placed just below the completed formation.
Example 1 – EUR/AUD, 2min (1-23-2009)
In the above example we have two completed morning star formation which are followed by bullish market reversals.