Following part 3, in part 4 we will guide and practice some candlestick patterns capable of signaling reversals. Through these candlesticks, you can predict the next trend and prepare yourself for a perfect trading plan. Let’s go with Coincu.

12) Morning Star

The morning star is a bullish reversal pattern that occurs at the bottom of a downtrend. As other candlestick patterns, it only signals a potential reversal, an idea which should ideally be confirmed with other indicators.  It reveals a slowing down of downward momentum before a large bullish move lays the foundation for a new uptrend.

Identifying the Morning Star on charts involves more than simply identifying the three main candles. What is required, is an understanding of previous price action and where the pattern appears within the existing trend.

• Establish an existing downtrend: The market should be exhibiting lower highs and lower lows.
• Large bearish candle: The large bearish candle is the result of large selling pressure and a continuation of the existing downtrend. At this point traders should only be looking for short trades as there is no evidence of a reversal yet.
• Small bearish/bullish candle: The second candle is a small candle – sometimes a Doji candle – that presents the first sign of a fatigued downtrend. Often this candle gaps lower as it makes a lower low. It does not matter if the candle is bearish or bullish as the main takeaway here is that the market is somewhat undecided.
• Large bullish candle: The first real sign of new buying pressure is revealed in this candle. This candle gaps up from the close of the previous candle and signals the start of a new uptrend.
• Subsequent price action: After a successful reversal, traders will observe higher highs and higher lows but should always manage the risk of a failed move through the use of well-placed stops.

It is important to note here that the second candle is the most important one. It can be bearish or bullish, as the focus is on indecisiveness and uncertain outcome as to which out of two sides will come out on top. 

How to trade with Morning Star Candlestick

Looking at the chart Near/USDT 4h, once the formation has been completed, traders can look to enter at the opening of the very next candle. More conservative traders could delay their entry and wait to see if price action moves higher. However, the drawback of this is that the trader could enter at a much worse level, especially in fast moving markets.

Targets can be placed at previous levels of resistance or previous area of consolidation. Stops can be placed below the recent swing low, as a break of this level would invalidate the reversal. Since there are no guarantees in the forex market, traders should always adopt sound risk management while maintaining a positive risk-to-reward ratio.

• Entry long: take an order at the opening price of next candle.
• Stop loss: below Lower shadow
• Take profit: take profit at the resistance zone with R: R 1:3

13) Evening Star

The evening star is a bearish equivalent of the morning star. The evening star appears at the top end of an uptrend. Like the morning star, the evening star is a three-candle formation and evolves over three trading sessions. It consists of three candlesticks: a large bullish candlestick, a small-bodied candle, and a bearish candlestick.

Identifying the Evening Star on charts involves more than simply identifying the three main candles. What is required, is an understanding of previous price action and where the pattern appears within the existing trend.

• Evening Star is a candlestick pattern appearing at the end of the uptrend and signals that an uptrend is going to take place
• It is a bearish candlestick pattern that consists of three candles: a large bullish candlestick, a small-bodied candle, and a bearish candle.
• Evening Star pattern occurs frequently in the charts and it also presents well-defined entry as well as exit levels.
• When the evening star pattern is backed up by volume and other technical indicators like resistance level, then it confirms the signal.

How to trade with Evening Star 

Looking at the chart Sand/USD 4h, once the formation has been completed, traders can look to enter at the open of the very next candle. More conservative traders could delay their entry and wait to see if price action moves lower. However, the drawback of this is that the trader could enter at a much worse level, especially in fast moving markets.

Targets can be placed at previous levels of support or previous area of consolidation. Stops can be placed above the recent swing high, as a break of this level would invalidate the reversal. Since there are no guarantees in the forex market, traders should always adopt sound risk management while maintaining a positive risk-to-reward ratio.

Entry short: take an order at the opening price of next candle.
Stop loss: above Upper shadow
Take profit: take profit at the support zone with R: R 1:11

Key takeaways from this chapter

We have looked at 13 candlestick patterns, and is that all you may wonder?. No, not really. There are many candlestick patterns, and we could go on explaining these patterns, but that would defeat the ultimate goal. The ultimate goal is to understand and recognize that candlesticks are a way of thinking about the markets. You need not know all the patterns.

Think about car driving; once you learn how to drive a car, it does not matter which car you drive. Driving a Honda is pretty much the same as driving a Hyundai or Ford. Driving comes naturally irrespective of which car you are driving. Likewise, once you train your mind to read the thought process behind a candlestick, it does not matter which pattern you see. You will know how to react and set up a trade based on the chart you are seeing. Of course, to reach this stage, you will have to go through the rigour of learning and trading the standard patterns.

So our advice to you would be to know the patterns that we have discussed here. They are some of the most frequent and profitable patterns to trade on the crypto markets. As you progress, start developing trades based on the thought process behind the bulls’ actions and the bears. This, over time, is probably the best approach to study candlesticks.

Verdict

With 4 parts, we want you to understand the real nature of candles. Read a candle, so when you look at the chart you can understand what state the market is in. From there comes an effective trading method. For newbies, this is the first part you should learn when entering this market. Because candles are the reflection of the psychology of the whole market. In the next sections, we will learn more basic and more advanced concepts with you.

If you have any questions, comments, suggestions, or ideas about the project, please email ventures@coincu.com.

DISCLAIMER: The Information on this website is provided as general market commentary, and does not constitute investment advice. We encourage you to do your own research before investing.

Alan

Coincu Ventures