Morning and Evening star reversal pattern

 A gap in a chart can give us much information.  Essentially a gap could be an entry point or an exit point. A gap down is an indication that fear and panic are on the increase. From a trader’s point of view, a gap down is a signal that warns a bottom is nearing. The trader has all the reason to anticipate a buy signal in a gap down pattern. the gap up tells us the stock price has reached a point of resistance and a sell off  is about to set in. from a traders point of view, this is ideal time to sell the holdings or go short in the market. The gap down and gap up could be noticed in a Morning star and Evening star candle patterns, which have been described below.

The eastern sky sees a morning star just before a sunrise. Since it foretells a reversal, ahead of other indicators, this pattern is known as Morning star.   

The Morning star pattern is a bullish reversal pattern. The Morning star candle pattern is a combination of three candles. The morning star candle formation can form in a downtrend. A long bearish candle on day one is followed by a short-bodied candle. This short candle should have opened in gap down. The following day that is the third day, a gap up opening seen in the form of a white candle. The closing of the third day’s candle should be above or nearer to the midpoint of the first candle. In most charts, this type of Morning star candle pattern points to a trend reversal. The reluctance in selling anticipating a trend reversal halts the price slide and drives the market upwards.

 

The evening star in the sky announces the night and darkness is nearing. The evening star too tells us the same message, that the dark days are ahead. 

The Evening star pattern is just the opposite of Morning star can pattern. This pattern too requires three candles. In an uptrend market a bearish reversal pattern with a small body appears. This candle will be a gap up candle. This candle is to be taken as a second day pattern. On the third day, another candle forms gap down and closes somewhere near the midpoint of first day’s candle. This pattern is an indication that the sellers are active in the market. The lack of buying activity could drive the price downwards, which is foretold in the form of Evening star.

 Usually the Morning and Evening star reversal patterns accompanied by large volumes, which is also supportive of the reversal trends. Both Morning star and Evening star patterns are very reliable and gives the trader an excellent opportunity to enter trade.

The Hanging man, Hammer and the Inverted Hammer patterns

The Hanging Man described in the figure is a single candle pattern.  The identification of this pattern is fairly easy. It has a small body a long lower shadow. The shadow should be around twice the length of the body. The name Hanging man has been assigned because it resembles a head and long feet hanging from it. The formation of this pattern normally happens in an uptrend market. The Hanging Man pattern appears when a stock opens higher than the previous day but unable to hold on and trades low, but at the end of the day the buyers manage to propel the price upwards. The color of the body can be anything. But a black candle carries more weight towards bearishness. A longer shadow too can be indicative to a bearishness. Similarly a large volume will be supportive of the signal. For trading purpose, the Hanging Man pattern needs a confirmation signal on the following day.

The Hammer pattern described in the figure is one of the easily identifiable patterns. The hammer is a single candle pattern. it has a small body and only a lower shadow. The shadow’s length is around twice that of the body of the candle. The Hammer pattern appears when a stock opens lower and sees the low of the day, but rallies back  to regain some of the losses.. The formation of this hammer pattern could be seen at the bottom of a downtrend. The long lower shadow is an indication of presence of buyers. Although the color of the body is not very important, a white body makes the pattern stronger. The hammer pattern is also seen a potential support level. The hammer is a very reliable reversal pattern.

 The inverted Hammer is also a single candle reversal pattern. This pattern could form in a downtrend and therefore is a trend reversal pattern. The price opens lower than the previous candle and sees higher trading levels. But during the day’s trade, sheds some price gains and closes nearer to the opening price. The pattern resembles a hammer in an inverted manner.This pattern needs a confirmation candle on the following day's trading.

All the above three patterns are very important reversal patterns that should be paid attention to.

Doji reversal patterns

 The Doji is a single candle pattern that can appear in an uptrend or downtrend markets. When the opening and the closing price of a stock is almost same a horizontal line will cross the vertical line that represent the high and lows of the day. This kind of appearance is known as Doji candle pattern. This is one of the most important patterns that cannot be overlooked. The Doji pattern point to indecision in the minds of traders indecision means there is a difference of opinion regarding the trend of the market. The Doji is a very reliable trend reversal indicator. At the top of a trend it signals that the resistance levels have been touched. At the bottom of a downtrend, the Doji pattern signals the formation of support levels.  

There are three main types of Doji patterns that can be easily understood. They are  (1) The Long Legged Doji  (2) The Gravestone Doji (3) Dragonfly Doji 

The Long legged Doji (JUJI) is self explanatory pattern which suggests the day’s activity. The Bulls and the Bears have been very active. The bears trying to drive the price down, but the bulls have managed to drive the price up by intensive buying. 

The Grave stone Doji (TOHBA) indicates, the lack of buying interest in the market and only the sellers were active. The open and close price is at the low of the day’s trading. The absence of bottom shadow the Doji candle appears to be like a grave stone. Hence the name Gravestone Doji. 

A Dragonfly Doji (TONBO) appears where the open and close price is at the high of the day’s trading. The pattern indicates there is buying interest in the trader’s mind. Moreover, virtually no sellers present.  We can observe this pattern forming at the bottom of a trend indicating the turn of the trend well in advance.

Besides these patterns, we do come across two other Doji patterns worth mentioning. They are (4) Morning Doji star and (5) Evening Doji star. The Morning Doji star pattern can form in a downtrend this comprises of a black candle, Doji and a white candle. The third days’ white candle must close within the first day’s black candle. This formation is regarded as a strong reversal point.

The Evening Doji star is likely to appear in an uptrend. This pattern includes a white candle, a Doji and a black candle. The third day’s black candle should close within the body of the first day’s white candle. This pattern is a strong indicator of a trend reversal.

Both Morning and Evening Doji stars are very reliable patterns that can offer trading opportunities.