Morning Star is another strong candlestick pattern. It is formed at the end of a downtrend. Thus, this directly means that the formation of a Morning Star pattern signals the end of a downtrend and a beginning of an uptrend. This is why the Morning Star pattern is called a bullish reversal pattern.
According to the book Think, Trade, and Grow Rich, the Morning Star pattern has an accuracy of 78%. While investors will debate on a statistical number, just know that this pattern has a pretty high accuracy rate.
The Morning Star pattern got its name because like a morning star comes at the beginning of a bright sunny day, this pattern comes at the beginning of a profitable uptrend. This is how to spot a Morning Star pattern on a candlestick chart:
1) Like in all the patterns we are going to discuss, the long-term trend (1-year trend) should be in an uptrend. There is very little chance to succeed if the long-term trend is against your favor. Remember, it is difficult to swim against the tide. Our job as technical chart readers is to wait for the right time when the tide itself is going where we want to go.
2) The intermediate-term trend (3 months trend) should also be preferably bullish.
3) There should be a minor correction or a pullback. Remember, as a trend follower, a minor pullback after a bullish upswing is the best time to enter.
4) The first candle is bearish and extended.
5) Second is a Doji (candle with a small body) with its real body beneath the first candle’s real body. It does not matter if the Doji is green or red.
6) The third candle is bullish and extended with the real body above the Doji’s real body.
7) It is better if the star is a gap down from the first and third candles.
8) The size of the third candle shows the strength of the reversal. The longer the better.
You may wait for another green candle after the third candle to confirm the reversal of the trend. You can also buy the shares on the next day after the formation of the third candle. Apart from having high accuracy, the Morning Star pattern has high strength. This means that the uptrend will continue for quite some time. You can exit after you hit your target or after the formation of a bearish reversal signal like a Doji or a Dark Cloud Cover pattern.
One peculiar advantage of the Morning Star pattern is that the pattern gives the Support itself. The Support is the price level below which the stock price has difficulty falling. However, if the price actually falls below this level, it will keep falling until it finds another Support level. In a Morning Star pattern, the lowest wick of the Doji is the support level. If the price violates the support and breaks down below it, you should consider that the Morning Star pattern was a false signal. Maybe the bullish sentiment is still immature. It is wise to wait till the formation of another decisive bullish reversal pattern.