Morning/Evening Star
Morning Star and Evening Star are the triple candlestick patterns that usually occur at the end of the market trend. They can be used as a visual sign for the start of a trend reversal, however, they become more strong when other technical indicators back them up.
The Morning Star pattern is presented with a bearish long-bodied candle followed by the green/red small body or Doji, and another bullish candle with a close above 50% of the body of the first bearish candle.
The Evening Star pattern consists of a long-bodied bullish candle followed by the green/red small body or Doji, and another bearish candle with the close below at least 50% of the first candle’s body.
Signal:
Morning Star is a signal for a reversal upward. The bigger gaps down between the first and second candles, and up between the second and third — the stronger pattern is. The Doji morning star shows the market indecision more clearly than a morning star with a thicker middle candle.
Similarly, if the Evening Star pattern is found on the chart, it may be a bearish signal. The bigger the gaps between candles — the stronger the signal is.
Formation:
The Morning Star pattern forms following a downtrend and indicates the start of an upward market. One of the most important factors that confirm pattern formation is volume. Generally, a trader wants to see volume increasing throughout the three candles making up the pattern, with the third candle seeing the most volume. High volume on the third candle is often seen as a confirmation of the pattern, and a subsequent uptrend regardless of other indicators.
The first candlestick of the Morning Star pattern must be massive-bodied. The second candle is the “star”, which has a short body and serves as an indicator that the bears are losing their capacity to drive the market down. This weakness is confirmed by the third candlestick, which must be close enough to the body of the first candlestick.
The Evening Star pattern is mostly used to predict future price declines. The volume is also important for this pattern as for Morning star. The Evening Star pattern is more reliable if the first candlestick’s size is smaller than the third one.
The second candlestick (the star) is the main and the first indication of weakness for the Evening Star pattern. It indicates that the buyers were unable to push the price up to close much higher than the close of the previous period. This weakness must be confirmed by the third candlestick of the pattern.
It is important to note that these patterns work best when they are backed up by volume, and some other indicators like a support/resistance level. Otherwise, it is very easy to see morning/evening stars forming whenever a small candle pops up in a downtrend or uptrend.
Abandoned Baby
Abandoned Baby is a three candlestick pattern that signals at least a short-term trend reversal. This pattern is fairly rare as the price movements need to meet specific criteria in order to create these patterns. It can be bullish or bearish.
Construction of Bullish Abandoned Baby is quite similar to Morning Star. The main difference is that the Doji candle in the middle gaps below the tails of the first and the third candles.
The Bearish Abandoned Baby is also almost the same as the Evening Star but the Doji in the middle gaps above the tails of the first and the third candles.
Signal:
If the Bullish Abandoned Baby pattern was spotted in a downtrend — it can be an upward reversal trend signal. If Bearish Abandoned Baby occurs during the uptrend — it indicates a downward reversal.
Formation:
It’s easy to remember how the patterns look from their name. A Doji in the middle with gaps on both sides resembles a baby (tiny candle), abandoned by two parents (full-bodied candles).
The idea behind the Bullish Abandoned Baby pattern is that the price has been dropping aggressively during a downtrend and just had a big sell-off (first down candle). This leads to increased selling pressure and price makes a negative gap.
However, after such powerful bearish moves, sellers may be exhausted, and the price forms a Doji when open and close prices are nearly the same. Doji’s appearance may indicate that sellers are losing momentum and buyers are starting to step in. The Doji is followed by a strong bullish candle that typically gaps higher from the Doji. This shows that buyers have regained control. The expectation is that the price will continue to move higher as the pattern shows that selling has been at least temporarily exhausted.
Сonversely, Bearish Abandoned Baby occurs during an uptrend and includes a big bullish candle as the first candle which drives the price up. After that, the price makes a positive gap and forms a Doji which shows the moment of indecision on the market. Sellers get the control back and a long bearish candle appears which can be the start of a downtrend.
These patterns are useful for identification of the new trend: the Bullish Abandoned Baby can be used as an entry point (for long), while the Bearish Abandoned Baby pattern — is as an exit point (or entry to open a short position).
Three White Soldiers/Three Black Crows
Three White Soldiers and Three Black Crows form at the end of the trend and are considered price reversal patterns.
The Three White Soldiers pattern consists of three candles, each long, bullish, and almost the same length. The opening of each candle is above the opening of the previous candle, and the close is higher than the previous close.
The Three Black Crows pattern also consists of three long candles with almost the same length but bearish ones. The opening of each candle is below the opening of the previous candle and the close is lower than the previous close.
Signal:
If the Three White Soldiers pattern is spotted after a downtrend — it may indicate a reversal upward. If the Three Black Crows pattern occurs after an uptrend it may be a signal for a reversal downward.
The Three White Soldiers pattern can be used as an entry point (for the Long position). The Three Black Crows pattern can be used as an exit point (or option to go short).
Formation:
The Three White Soldiers candlestick pattern suggests a strong change in market sentiment, and usually indicates a weakness in an established downtrend. When this pattern appears, it may indicate the potential emergence of an uptrend, because buyers get more strength and increase buying pressure.
However, it’s important to note that strong moves higher could create temporary overbought conditions. The price could also reach key resistance levels after significant moves, and that may lead to some period of price consolidation.
In addition, Three White Soldiers can also appear during periods of consolidation itself, which is an easy way to get trapped in a continuation of the existing trend rather than a reversal. A trader should always watch the volume supporting the formation of Three White Soldiers. Any pattern on low volume is suspect because it is the market action of the few rather than the many.
The Three Black Crows pattern works the opposite way. It usually indicates a weakness in an established uptrend and the potential emergence of a downtrend.
This is a moderate trend reversal pattern that should only come into consideration when it appears in a rally or an established uptrend. Strong moves down can create oversold situations and the price can reach support levels — it may bring about some price consolidation. It is also important to check whether the pattern appears during the period of consolidation itself. Volume has to be strong for Three Black Crows to be valid.
Three Inside Up/Down
Three Inside Up, and Three Inside Down are patterns that may indicate that the current trend has lost momentum and a move in the other direction might be starting.
The Three Inside Up consists of a long red candle followed by a smaller engulfed bullish candle reaching at least the midpoint of the first one, and followed by another bullish candle, closing above the first candle’s high. The Three Inside Up pattern is spotted at the bottom of a downtrend.
The Three Inside Down is right opposite of the Three Inside Up pattern, and may indicate a trend reversal and the end of an uptrend. The Three Inside Down pattern consists of a long green candle, followed by a smaller engulfed red candle reaching at least below the midpoint of the first candle, and the bearish candle, closing below the first candle’s low.
Signal:
The Three Inside Up indicates the reversal upward, meaning that the downtrend could be ending, and a new uptrend begins. If the Three Inside Down is spotted, it may be a signal that the uptrend is potentially ending and a new reversal downtrend has begun.
Formation:
The Three Inside Up pattern indicates the signs of the current trend losing momentum, and warns the market movement in the opposite direction. The first candle should be found at the bottom of a downtrend, and is illustrated by a long bearish candlestick that may reach new lows. Such a situation can discourage buyers, while sellers grow confident. However, the second candle opens within the prior candle’s trading range, and closes higher than the midpoint of the first candle. This can be seen as a red flag for short-term sellers and they may use this opportunity to exit. The third candle completes a bullish reversal and confirms buyers’ strength. It attracts those who want to open long positions and the remaining bears get trapped.
Conversely, the Three Inside Down candlestick formation is found at the top of an uptrend. The first candle is characterized by a long bullish candlestick and can reach new heights. However, the second candle goes below the midpoint of the first candle. This causes concern for the buyers, and some of them may use this opportunity to close their long position or sell them. The third candle completes a bearish reversal and confirms sellers’ power in the market. Short traders may jump in to take advantage of the falling price and buyers may be forced to consider selling.
Disclaimer: For information purposes only. Not investment or financial advice. Seek professional advice. Digital assets involve risk. Do your own research.
