Optimal Entry Points With an Evening Star

The evening star is a bearish reversal pattern that appears at the end of an uptrend. It consists of three candlesticks:

1. A long bullish (green) candle, indicating strong buying activity.
2. A small-bodied candle (either bullish or bearish), representing indecision and signaling that the upward momentum may be weakening. Ideally, it should not touch the real body of the first candle.
3. A long bearish (red) candle, confirming the reversal and indicating strong selling activity. The third session usually closes well into the bullish candlestick that makes up the first candle of this pattern.

The evening star suggests that the market sentiment has shifted from bullish to bearish, and it is often used by traders as a signal to consider exiting long positions or entering short positions.

How to Identify an Evening Star

Here are various strategies for entry points after the appearance of an evening star pattern:

1. Immediate Entry

As soon as an evening star appears after a defined and mature uptrend, it may be an opportunity to open a short position.

This approach is more aggressive and can be adopted when expecting a swift change in market direction.

• Advantages: You won't miss out on the trading opportunity.
• Disadvantages: You're entering a position without additional verification.

We recommend adopting this strategy only if the market is clearly overbought, the star (second candle of the pattern) gaps above the first candle, and the third candle closes well into the first.

We don't recommend this method with lower timeframes, such as hours or minutes. The reason is that the gap between the first and second candles of the pattern is much less likely in these situations.

2. Wait for a Retest

Following a robust uptrend, the emergence of an evening star followed by a market downturn doesn't necessarily eliminate existing buying pressure. This lingering momentum could prompt the market to retest the highs established by the evening star before initiating a more definitive downtrend.

Some traders opt to hold off on initiating a short position until the price retests the highs set by the evening star. Keep in mind that following an uptrend, the evening star serves as a resistance zone. This approach validates that this resistance, indicated by the high of the evening star pattern, holds. Additionally, this level can serve as a reference for setting your stop-loss when employing an evening star strategy.

• Advantages: A successful retest of the resistance established by the evening star offers additional validation, thereby bolstering the pattern's credibility as a reversal indicator.
• Disadvantages: Given that the highs of the evening star aren't always revisited, you might miss out on a trading opportunity.

3. Confirmation Entry

This is the most conventional approach in Japanese candlestick analysis. To implement it, just await the next candle to validate the market's direction after the evening star. That is, consider opening a short if the subsequent session is bearish and closes below the lows of the evening star formation.

• Advantages: This strategy serves to confirm the market's direction following the appearance of an evening star.
• Disadvantages: The risk-to-reward ratio deteriorates.

4. On an Additional Reversal Signal

If an evening star appears after an uptrend, wait for additional bearish signals before opening a short position. These could manifest as a shooting star, a dark cloud cover, or another bearish indicator.

Be aware that such confirming signals could also appear before the evening star.

• Advantages: A reversal pattern that either precedes or succeeds the evening star amplifies its credibility as a reversal signal.
• Disadvantages: If no additional candlestick pattern appears within the price range of the evening star formation, you risk missing a trading opportunity.

5. After an Upthrust

An upthrust happens when the market briefly breaks through a resistance level, only to quickly reverse course and move in the opposite direction. Essentially, it acts as a false breakout to the upside and serves as a reversal indicator.

Upthrusts frequently occur in markets and can serve dual purposes: to validate a reversal as signaled by an indicator, such as the evening star, and to set a stop-loss level above the upthrust's peak.

• Advantages: After an upthrust, the likelihood of a trend reversal rises substantially.
• Disadvantages: The updated stop-loss should be determined by the high points of the upthrust, positioning it further away from the entry point.

Though upthrusts are not a certainty, when they do manifest, executing the evening star strategy with a stop set at the peak of the upthrust is generally a reliable tactic.