The Morning Star Pattern is a bullish pattern that appears in the first few days of a new period. It consists of five to seven candlesticks, each with lower lows and higher highs. The pattern is comprised of the following:

– The first morning star candlestick has an overall body that extends vertically downwards from its open to close prices with a low opening price and then continues down through the middle part of this candle, including two successive support lines.

– The second candle of the pattern is similar to the first but does not quite close at the low point of the first candle.

– The third candle is a small real body (white), which makes up for the missing gap in the second candlestick.

– The fourth candlestick has an overall body that moves substantially below its open price and remains below; its high and low may or may not touch or be contained within the previous three candles.

– The fifth candle must open above the high of the fourth candle and finish above it, with a body entirely within the previous range for the pattern.

– The sixth candlestick opens below the low of the fourth candle and finishes slightly above it; its highs and lows may or may not touch or be contained within the previous five candles.

– The seventh candle is a small real body (white), which makes up for the missing gap in the sixth candlestick.

As you can see, many rules must be followed or else the pattern is not valid.

Rules for a valid Morning Star Pattern

The morning star candlestick pattern has five to seven candles. There must be at least two (but not more than seven) consecutive candlesticks within the period.  

On the first day, the second candle of the pattern must have a body that is at least as large, if not larger, than that of any of the previous three (or less in some cases) within and including the period.    The third candle must be small and white, and if you want to buy the stock, it should open at a higher price than the second candle in the previous period.

The fourth candle must have a body size of at least one-third smaller than that of any of the previous three candles.

The fifth candle must open above the high of the fourth candlestick and close within its range, thus making money for traders long with this trade.

The sixth candlestick must open below the low of the fourth candle, and it must close at a higher price than that of any of the previous three candles.

The seventh candle is a small real body (white), which makes up for the missing gap in the sixth candlestick. It is generally considered a bullish sign if it opens at a high price and trades within its range.

Taking all of those rules into account, make sure you do your research on this pattern before trading in it.

How to trade the pattern

The ideal entry for this pattern is as a reversal, but it may also be traded in a continuation scenario as long as the trader has other valid signals. The optimal position is long towards the end of the fifth candle. The stop loss should be placed below the low of the first candlestick of the pattern, and any trailing stop should be adjusted with each new low below prior support.

What are Limitations of the Morning Star Pattern

The Morning Star pattern has several limitations. You can use them to avoid getting trapped in a trade when you believe the pattern is valid. The Morning Star Pattern is not recommended in the following conditions:

– When the trend is up, the third morning star candlestick should be white, but it must close below its opening price. If it does neither, then the pattern is invalid. For example, assume that a stock has been going down for about four days and has declined as far as $15.00, but now it bounces back up to $15.80. Then, on Thursday, the stock bounces back up to $15.50, and on Friday, it drops to $15.00. Since that second bounce is not a valid morning star pattern, you may have difficulty with this trade.

When the trend is down, Candles two and six should be white even though they are unchanged from the previous candle opening prices and closing prices. If they are not, then the pattern is invalid. You will have difficulty with this move when it reaches as low as $11.78 on a stock chart before turning back to its old levels.

– When the price changes direction and the reversal point is reached, things are different. The third candle must close below its opening price, without touching it or closing any lower. You will have difficulty with this move when it reaches as low as $10.50 on a stock chart before turning back to its old levels.

Most common mistakes

The most common mistake made in the morning star pattern occurs when traders try to find patterns in non-correlated assets and markets. If you are trading different markets or asset classes, there is a chance that you will confuse similar types of candle formations and not the Morning Star pattern since they look similar but have different meanings.

Conclusion

When used as a reversal, this pattern has potential for rapid gains, but it can also become a huge time waster if you do not know the rules. The morning star pattern is unsuitable for short-term traders and should only be used with other valid signals and confirmations. Be sure to learn how to trade the morning star pattern because it is a valuable tool that can be used successfully in many situations by experienced traders. It is a significant reversal pattern when other indicators are not functioning properly.