The morning star is a relatively powerful upward reversal figure, composed of three candlesticks. The 2nd candlestick is the star itself.
The elements that characterize it are:
- The morning star must appear after a downtrend.
- The 1st candlestick must have a red body.
- The 2nd candlestick should draw a bearish gap, it ideally has a small green body.
- The 3rd candlestick ideally (but not necessarily) traces a bullish gap and has a large green body.
Such a structure is formed when, following a downward trend, after a day of loss, the rates open with a down, forming a gap from the close of the previous day. The next day the course opened in a bullish gap and go up to regain much of what has been lost on the 1st candlestick. This confirms the structure and the major forces are now bullish.
Note that the 2nd candlestick must form a gap with the 1st, but between the 2nd and 3rd candlestick, the gap is preferable but not mandatory. As for the body of the 2nd candle, the color does not matter, even if green is ideal.
The larger the gaps, the more significant the figure. Similarly, the more the 3rd candlestick erases losses of the first one, the more it will be. Large volumes on the 3rd candlestick will also come in confirmation of the figure.
Whatever the qualities of the first gap and the star, it is better to wait out for the figure and the green body to form before initiating a position. The morning star is a powerful figure, it can lead to purchases at J+2 (J being the day of the star and that of J+1 that of the green candlestick). The threshold for invalidation may be placed either below the lowest formed by the structure, or below the second gap if it occurred.
On the other hand it is interesting to combine the observation of reversal figures with the lines of support and resistance. A morning star and can sometimes form at the level of support and traverse it momentarily without invalidating it and lead to an upward reversal.
The morning star has variations. The inverted hammer is a less powerful. There is also the morning star doji, which is slightly stronger than the classic morning star, where the star is formed by a doji.