The morning star is a bottom reversal signal and it illustrates that prices are going to go up. The Japanese rice traders described it as the planet Mercury, or the morning star, since it foretells brighter things to come. Identifying this signal among other candlestick patterns is relatively easy since it is visually apparent to the eye. There are some very simple parameters that can enhance this signal’s probabilities of creating a reversal. These are explained below.
- The downtrend has been apparent.
- The body of the first candle is black or red and is continuing the current trend.
- The second candle is an indecision formation.
- The third day shows evidence that the bulls have stepped in so this candle should close at least halfway up the black or red candle.
- The longer the black or red candle and the white or green candle, the more forceful the reversal is.
- The more indecision that the star day illustrates, the better the probability that a reversal will occur.
- A gap between the first day and the second day adds to the probability that a reversal is occurring.
- A gap before and after the star day is even more desirable.
- The magnitude that the third day comes up into the black or red candle of the first day indicates the strength of the reversal.
A strong downtrend has been in effect and the sellers start to panic. There is a large sell-off day, but the next day as the selling continues, the bulls step in at the low prices. If there is big volume during these days then it shows that ownership has dramatically changed hands. The second day does not have a large trading range and on the third day the bears start to lose conviction as the bull increase their buying. When the price starts to move back into the trading range of the first day then the sellers will diminish and the buyers will seize control. Keep in mind that a Doji or a spinning top is usually the predominant formation in a morning star signal. The important factor is to witness the confirmation of the bulls taking control the next day. That candle should consist of a closing more than half-way up the black or red candle of two days prior.
Continue to learn about candlestick signals and read about the evening star.