What is Evening Star Candlestick Pattern?

The evening star candlestick pattern is a price action trading technique used by technical analysts to determine when a trend is ready to change direction. It consists of three candles; a red candle, a small-bodied candle, and a huge white candlestick. Candlesticks represent stock information by displaying open, high, low, and closing prices over a specific time frame. Each candlestick has two wicks, and the difference between the highest and lowest price during a trading day determines its length. Longer candlesticks indicate significant price moves, while shorter ones show minimal price change. 

Identifying the Evening Star Candlestick Pattern with Examples 

The evening star candlestick pattern is a bearish reversal pattern that is created following an increase, and it indicates a potential reversal in the trend. This trend is drawn with the help of three successive candles. All of them tend to become less about buying pressure and more about selling pressure. The following is a simple step-by-step description of the formation of the evening star candlestick pattern with clear illustrations. 

1. First Candle: Strong Bullish Candle The first candle in this pattern is a long bullish (green) candle. It indicates strong buying momentum and confirms that the market is in an uptrend. Buyers remain in control, pushing prices higher with confidence. 
   Example: A stock opens at ₹500 and closes at ₹520, forming a strong bullish candle during an ongoing upward trend. 
2. Second Candle: Small-Bodied Candle  The second candle is small with a real body and may either be a bullish candle or a bearish candle. This candle represents the market’s indecision; buyers are losing momentum and are starting to show interest. It usually fills in the gap of the initial candle, which increases the validity of the pattern. 
   Example: The stock opens and closes at ₹522 and 521, respectively, creating a small-bodied candle signifying indecisiveness following the earlier high surge. 
3. Third Candle: Strong Bearish Candle The third candle is a long bearish (red) one, which closes deep into the body of the first one. The change of market sentiment is validated by this candle, which means that there is now control on the sellers, and the market may subside. 
   Example: The stock opens at ₹520 and closes at ₹495, forming a strong bearish candle that erases most of the earlier gains. 
4. Confirmation of the Evening Star Pattern The evening star pattern is considered complete when the third bearish candle closes below the midpoint of the first bullish candle. Higher trading volume during the third candle further strengthens the reversal signal. 
   Example: Once the three-candle pattern is complete, the stock proceeds to fall in subsequent sessions and thus indicates the bearish reversal. 
5. Practical Trading Interpretation The evening star pattern is normally employed by traders as an indication of long position exit or short-selling opportunities. It is usually used together with another technical indicator, like resistance levels or momentum oscillators, to be more accurate. 
   Example: If the evening star pattern forms near a resistance zone, traders may place a sell order with a stop-loss above the second candle’s high. After understanding what is evening star candlestick pattern and how to identify it, let’s understand how it works.  

How does the Evening Star Candlestick Pattern Work? 

Now that we understand how to identify evening star pattern, let us figure out how this stock-price chart pattern works:  

• Candlestick patterns are concise ways of presenting information about a stock. They generally represent the open or close prices and high and low prices of a stock.  
• Each of the candlesticks has a candle and two wicks. The length of a candle is the measure of the range between the highest and lowest price points on a trading day.  
• If the length of a candle is long, it is an indicator of higher price changes. Conversely, a small-length candle shows smaller price changes. Long candlesticks represent excessive buying or selling based on the direction of a trend. Similarly, short candlesticks show very few movements in stock prices.  
• This stock-price chart pattern is a beneficial tool for technical analysis. It predicts the future price momentum and investor sentiments - three candles for the pattern in three days, one for each day.  
• On the first day, the large white candle indicates rising prices with strong momentum. Following this sudden price rise, momentum becomes weaker on the second day, making a smaller candle. The third day has a large red candle as the prices open much below the previous day's close. It confirms the formation of the stock-price chart pattern.   
• The evening star is a reversal pattern trend and appears after an uptrend in the charts. It only signals the point where there will be a potential downtrend or reversal in the price. 

Advantages and Disadvantages of the Evening Star Pattern 

Here are the advantages and disadvantages of the evening star pattern: 

 How to Trade Using the Evening Star Pattern?  

Traders need to follow these steps to trade using the evening star pattern.  

• Price Analysis 
  Identify the evening star pattern after a clear uptrend and near a resistance level, as the pattern is more reliable when it forms after sustained upward price movement. 
• Integration of RSI Indicator 
  To verify the signal, investors can use the Relative Strength Index (RSI). Another signal of an overbought area is when the index rises above 70 (overbought zone), which enhances the possibility of a bearish reversal. 
• Entering the Market 
  Enter a sell trade or exit long positions after the third bearish candle closes, confirming the completion of the evening star pattern. 
• Setting Stop Loss 
  Traders can place a stop-loss above the high of the second candle (the star candle) to limit potential losses if the price moves against the trade. 
• Time Frame Change 
  Time frame change means checking the pin bar on a higher or lower chart to see if the trend supports it. 

Disclaimer: All investments are subject to market risks, economic conditions, regulatory changes, and other external factors. Returns are not guaranteed and may vary based on market performance and investment tenure. Investors should assess their risk tolerance and financial objectives, conduct their own research, and consult a qualified financial advisor before making any investment decisions. 

Conclusion 

The three-candle evening star pattern provides excessive help in identifying short-selling opportunities. The pattern is very convenient to spot on a chart, which is the best part of it. When combined with other technical analysis tools like horizontal resistance effectively gives new downtrend signals. Therefore, traders can use it to decide the entry and exit points during a trade; they just need to download a stock trading app and start trading.