Forex: Morning Star

The Morning Star Pattern is a bearish reversal pattern, usually occuring at the bottom of a downtrend.
The pattern consists of three candlesticks:

1. Large Bearish Candle (Day 1) 
2. Small Bullish or Bearish Candle (Day 2) 
3.  Large Bullish Candle (Day 3)  

The first part of a Morning Star reversal pattern is a large bearish red candle. On the first day, bears are definitely in charge, usually making new lows. The second day begins with a bearish gap down. It is clear from the opening of Day 2 that bears are in control. However, bears do not push prices much lower. The candlestick on Day 2 is quite small and can be bullish, bearish, or neutral (i.e. Doji). Generally speaking, a bullish candle on Day 2 is a stronger sign of an impending reversal. But it is Day 3 that holds the most significance. Day 3 begins with a bullish gap up, and bulls are able to press prices even further upward, often eliminating the losses seen on Day 1.

The chart below shows an example a Morning Star bullish reversal pattern that occured at the end of a downtrend:
Day 1 of the Morning Star pattern for the chart above was a strong bearish red candle. Day 2 continued Day 1's bearish sentiment by gapping down. However, Day 2 was a Doji, which is a candlestick signifying indecision. Bears were unable to continue the large decreases of the previous day; they were only able to close slightly lower than the open.

Day 3 began with a bullish gap up. The bulls then took hold for the entire day. Also, Day 3 broke above the downward trendline that had served as resistance for the past week and a half. Both the trendline break and the classic Morning Star pattern gave traders a signal to go long.

The Morning Star pattern is a very powerful three candlestick bullish reversal pattern. The bearish equivalent of the Morning Star is the Evening Star pattern.

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