Morning Star: A Powerful Three-Candle Reversal Pattern Every Trader Should Know
In technical analysis, candlestick patterns play a crucial role in predicting potential market reversals. Among the many reversal patterns, the Morning Star stands out as one of the most reliable indicators of a shift from bearish to bullish sentiment. This three-candle pattern provides traders with a clear signal that selling pressure is weakening and that buyers are gaining control.
In this comprehensive guide, we will cover:
- What is a Morning Star pattern?
- How to identify it on a chart?
- Why does it form?
- How to trade it effectively?
- Common mistakes and key takeaways.
By the end of this article, you’ll have a deep understanding of how to use the Morning Star pattern in your trading strategy.
What is a Morning Star Pattern?
The Morning Star is a three-candle bullish reversal pattern that appears at the end of a downtrend, signaling a potential shift in momentum from bearish to bullish. It consists of:
- A Large Bearish Candle (Day 1) – This indicates that selling pressure is still strong, continuing the prevailing downtrend.
- A Small Candle (Day 2) – This can be bullish, bearish, or neutral (doji) and represents indecision in the market. The downtrend is losing momentum, and neither buyers nor sellers are in control.
- A Large Bullish Candle (Day 3) – This candle confirms the reversal, as it opens higher and closes well above the midpoint of the first bearish candle, signaling that buyers have taken control.
The Morning Star pattern is a strong indication that sellers have exhausted their momentum, and buyers are stepping in to push the price higher. This makes it an excellent entry signal for traders looking to capitalize on a potential trend reversal.
For a valid Morning Star pattern, the third candle should ideally have a strong bullish close, confirming the transition from selling to buying pressure. The presence of higher volume on the third candle further strengthens the pattern’s reliability.
How to Identify a Morning Star Pattern?
To spot a Morning Star pattern on a chart, look for these key characteristics:
Essential Conditions:
✔ Occurs in a Downtrend – The market must be in a clear bearish phase before the pattern appears.
✔ First Candle is Strongly Bearish – This shows that sellers are still in control.
✔ Second Candle is Small (Indecision) – This can be a doji or a small-bodied candle, signaling hesitation.
✔ Third Candle is Strongly Bullish – It must close well above the midpoint of the first candle, confirming the reversal.
✔ Increased Volume on the Third Candle – Higher volume adds credibility to the pattern.
Invalid Conditions:
✖ If the pattern appears in an uptrend, it is NOT a Morning Star—it’s just a continuation pattern.
✖ If the third candle fails to break the midpoint of the first candle, the pattern lacks confirmation.
✖ If there is no noticeable shift in volume, the move may lack conviction.
Why Does a Morning Star Pattern Form?
The psychology behind the Morning Star pattern reflects a shift in market sentiment:
- Strong Selling Pressure (First Candle) – The market continues its downtrend as sellers dominate, pushing prices lower.
- Market Indecision (Second Candle) – The presence of a small-bodied candle indicates that selling momentum is weakening, and buyers are starting to step in.
- Buyers Take Control (Third Candle) – A strong bullish candle confirms that buyers have overpowered sellers, marking the start of a new uptrend.
This transition from bearish to bullish sentiment makes the Morning Star a highly effective reversal signal, especially when it forms near key support levels or oversold conditions on technical indicators.
How to Trade the Morning Star Pattern?
To trade the Morning Star pattern effectively, follow this step-by-step strategy:
Step 1: Identify the Pattern in a Downtrend
Ensure that the market has been moving downward before the pattern appears.
Step 2: Confirm with Additional Indicators
For higher accuracy, combine it with:
✔ Support Levels – If the pattern appears near a strong support zone, it adds credibility.
✔ Moving Averages – A Morning Star near the 50-day or 200-day moving average is a stronger signal.
✔ RSI (Relative Strength Index) – An RSI below 30 (oversold condition) increases the chances of a reversal.
✔ MACD (Moving Average Convergence Divergence) – A bullish crossover after the Morning Star pattern strengthens the buy signal.
Step 3: Place Your Trade
- Entry Point: Buy at the close of the third candle or on a slight pullback.
- Stop-Loss: Place below the low of the second candle to limit risk.
- Take Profit: Target the next resistance level or use a risk-reward ratio of 1:2 or 1:3.
Step 4: Monitor Trade and Adjust
- If volume remains high, the trend is more likely to continue.
- If price struggles at resistance, consider securing profits early.
Real-World Example of a Morning Star Pattern
Let’s take an example of a Morning Star pattern appearing on Tesla Inc. (TSLA) stock.
Market Conditions:
Tesla’s stock has been in a downtrend, falling from $250 to $200 over several weeks. The selling pressure remains strong, and investors expect further declines.
Formation of the Morning Star Pattern:
- First Candle: A large red candle forms, closing at $200, indicating continued bearish sentiment.
- Second Candle: The next day, Tesla opens lower at $198 but forms a small-bodied doji candle, signaling market hesitation.
- Third Candle: On the following day, Tesla opens higher at $202 and rallies to $210, forming a strong bullish candle that engulfs the previous doji and closes above the midpoint of the first candle.
Trade Execution:
- Entry: A trader enters a long position at $210 after the third candle confirms the pattern.
- Stop-Loss: Placed below $198 (the second candle’s low).
- Target: The next resistance level at $230, offering a favorable risk-reward ratio.
This real-world example illustrates how the Morning Star pattern helps traders spot potential trend reversals and make profitable trades.
Common Mistakes When Trading Morning Star
❌ Ignoring Volume – A pattern without volume confirmation is weak.
❌ Trading in a Range – Morning Star patterns work best at the end of a clear trend, not in choppy markets.
❌ Placing a Tight Stop-Loss – Market fluctuations can trigger stops too early.
❌ Forgetting Confirmation – Always use support levels or indicators for extra validation.
Final Thoughts: Is Morning Star Reliable?
The Morning Star is one of the most powerful and widely-used bullish reversal patterns. However, to maximize accuracy, traders should:
- Use it in combination with other indicators.
- Trade it near strong support zones.
- Always wait for confirmation before entering.
When applied correctly, this pattern can be an excellent tool for identifying trend reversals and increasing trading success.
