Star Trade

Star trade strategy in forex can be complicated since forex trading is full of charts, patterns, indicators, and market conditions. Among the most significant candlestick formations in this field are the star trade patterns which are most known as the Morning and Evening Star forex patterns. These patterns are traders’ favorite for their reliability and are pivotal in predicting trend reversals which are actionable insights for traders of all levels, but what exactly are these star patterns, how are they formed and how can a trader use them for their benefits? This article delves into the essence of these patterns, their formation, types, and tips for traders to use this strategy effectively. 

 

What is a Star in Forex and How Do Stars Get Formed in Forex? 

 

In forex, a star refers to a candlestick pattern that signals potential trend reversals in the market. These patterns show themselves during crucial market shifts which often signify a shift in the market sentiment from bullish to bearish or vice versa. 

A star trade forms over three candlesticks: 

• Two large candlesticks, one in the current trend direction and one in the opposite of the current trend direction. 

• One small-bodied candlestick, often a Doji or spinning top, indicates indecision. 

For instance, in a Morning Star, the first candle is bearish, followed by a small indecisive candle, and finally, an engulfing bullish candle that confirms the trend reversal. Conversely, the Evening Star in forex starts with a bullish candle, followed by a small candle, and concludes with an engulfing bearish candle. 

 

Is the Star Pattern a Technical Indicator?

 

Although the Morning and Evening Star forex trade patterns are not technical indicators in the conventional sense, they are still powerful candlestick patterns that are used in technical analysis. These patterns are generally visually interpreted on price charts and are supported by technical indicator tools like Fibonacci retracements or volume indicators to strengthen their reliability. What makes these patterns different is their ability to signal potential reversals without requiring additional overlays on the chart. (add more)

 

Types of Star Patterns 

 

There are various types of star patterns such as (1, 2, 3). But the Morning and Evening Star forex patterns are the most notable star patterns in forex. Let’s analyze each one separately:

1. Morning Star Pattern in Forex 

The Morning Star trade pattern is a bullish reversal pattern typically appearing after a downtrend. It has a simple structure: The first candle is Full body and bearish, followed by the second candle, which is small and represents indecision( like hammer and doji candles). The third candle, which is the last one, is again mainly full body and bullish, appearing near or above the midpoint of the first bearish candle. To understand it better, we can look at how a Morning Star works in forex.

The Morning Star works as a signal that bearish momentum is slowly fading, and buyers are beginning to increase in the market. 

Here’s a step-by-step breakdown: 

1.  Downtrend Confirmation: A strong bearish candle shows sellers are in control. 

2.  Market Indecision: The second candle (small) shows a halt in selling pressure. It may even form a doji, signaling that bulls are starting to step in. 

3. Reversal Confirmation: The third bullish candle demonstrates that buying pressure has overtaken selling pressure, marking the beginning of an uptrend. 

For example, imagine the EUR/USD pair trading in a downtrend at 1.04800. The first bearish candle drops to 1.04700. The second candle opens at 1.04700 and closes at 1.04720, forming a small body. The third candle opens at 1.04720 and rallies to 1.04820, forming a Morning Star. This signals traders to go long.      

  

     

2. The Evening Star Pattern in Forex

The evening star trade pattern is a bearish reversal pattern that can usually appear at the end of an uptrend. Similarly, it has a simple structure which includes a large candle at first, that is bullish as well. The second candle is small, showing market hesitation. The third candle is large and bearish, closing below the midpoint of the first bullish candle. To simplify it, we should know how the Evening Star works in forex.

The Evening Star trade strategy emphasizes the end of a bullish trend and the start of a bearish reversal. Here is how it unfolds:

1. Uptrend Confirmation: The first bullish candle shows buyers dominate the market. 

2. Market Indecision: The second candle’s small body reflects hesitation among buyers, which shows the selling pressure might be building. 

3. Reversal Confirmation: The third bearish candle confirms a shift in sentiment, starting a downtrend. 

For example, suppose that the USD/JPY pair trading in an uptrend at 145.00, and the first candle that is bullish rises to 145.80, followed by the second candle opens at 145.80 and closes at 145.60, forming a small body. Finally, the third candle which is bearish opens at 145.60 and keeps falling to 144.40, this is how an Evening Star which gives traders the signal to go short. 

 

How to Trade With Star Pattern? 

 

Trading with Star pattern can be Morning and Evening star pattern involves, first identifying the pattern and then confirming its validity. Then comes the most important point, using the appropriate entry and exit strategies.  Let’s take a look at it step by step:

1. Identifying the pattern: Traders use the candlestick charts to spot Morning or Evening Stars at specified support or resistance levels. 

2. Confirming the reversal: Traders can do this by using supporting tools like volume analysis. For example, a higher volume on the third candle shows the strength of the reversal signal. 

3. Setting entry points: For a Morning Star traders enter a long position when the third candle closes above the midpoint of the bearish candle. Conversely, for an Evening Star, traders enter a short position when this candle closes below the midpoint of the first bearish. 

4. Using stop-loss and take-profit: Traders place a stop-loss below the low of the Morning Star trade strategy for long positions and another stop-loss above the high of the Evening Star trade strategy for short positions. Traders also set take-profit targets at significant support or resistance levels. 

 

Morning Star Real Life Example: During the 2020 COVID-19 market crash, the GBP/USD formed a Morning Star on its daily chart near 1.15000. Traders using this pattern captured a bullish reversal that took the pair back to 1.30000.