Morning star candlestick pattern is a bullish candlestick patterns where stock starts uptrend after a long downtrend. That’s why this pattern is also known as trend reversal candlestick pattern. Morning candlestick pattern is composed of 3 candlesticks. Day 1 red candlestick, day 2 small candlestick, day 3 strong green candlestick.
Day 1 Red Candlestick
This day is associated with very strong big red candle. This shows the strength of downtrend and indicate downtrend is still strong.
Day 2 Small Candlestick
Day 2 is small body candlestick or doji candlestick. Generally stock gap down in next day and continues to go down. But after certain period, bull gets the strength and stock started to go up. This day become uncertain for existing trend. Day 2 can be either red or green candlestick with small body or doji.
Day 3 -Strong Green Candlestick
Day 3- candlestick gap up above the previous day candle opening if red body candle or open up previous day candle close if day 2 has the green body. Bull started to buy the stock as stock go up. When stock goes up above the 50 percent of the previous day candle , bear started to stopped out or reverse their position. If stock close up above the 50 percent of the day 1 candle, good morning candlestick pattern is formed. Higher the stock close above above the 50 percent of the day 1 candle, the pattern is better.
(Click to enlarge)
Morning star candlestick chart
This is real candlestick chart with morning star pattern. Stock has strong down move from $340 to $240. That’s good for the pattern. After one big red day stock made a small doji or small body bar. Next day stock gap up and close above the 80 percent of the red body. That’s confirm the morning candlestick pattern in the chart.
Trade setup for candlestick pattern
Entry should be above the yellow line(shown in the candlestick chart) or above the high of the third day green candle bar. This entry confirm the bull is control of the day.
stop loss should be below the blue line(shown in the candlestick chart) or below the low of the second day red bar. If stock breaks the low of the second day bar, the pattern is broken and assumed that down trend started again. That why this should be the stop loss.
This chart used daily candlestick chart for morning star candlestick patterns. This is also true for any time period. Morning star candlestick trading strategy is one of the popular trading strategy among the candlestick pattern trader