Candlestick patterns are one of the most commonly used and popular chart patterns you can find today. Candlestick helps identify the best price trend reversal levels on a chart. A fairly well-known candlestick pattern is the Evening Doji Star.
An Evening Doji star is a trend reversal pattern. A reversal candlestick pattern indicates a turning point in an existing trend and is a good indicator to take profit or reverse your position.
What is an Evening Doji Star?
The Evening Doji Star is a three-candlestick pattern in succession: a bullish candlestick, a Doji candlestick, and a bearish candlestick. It is a bullish trend reversal c pattern.
Evening Doji Star is very similar to Evening star except that Evening Doji star needs to have a Doji candle on the second line making it more bearish. A Doji Candlestick is a candlestick that looks like a cross because the opening and closing prices are equal or nearly equal.
The Opposite of the Evening Doji Star pattern is the Morning Dogi Star candlestick pattern, the bullish reversal pattern.
Identification Criteria
On the chart, the three candlesticks (the bullish candle, the doji candle, and the bearish candle) combine to form the Evening doji star candlestick pattern. To find perfect Evening Doji star patterns on the chart following criteria must be met:
- The body-to-wick ratio of bullish and bearish candlesticks should be better than 70%. At the same time, the wick/shadow of the candlestick indicates the market’s indecision as it indicates the momentum of the market buyers.
- The Doji candle should open above the close of the bullish candle. Gaps are much less likely to occur on longer timeframes in forex. Therefore, no gaps are required for forex currencies. However, the opening and closing prices of the doji candle must be the same.
- The bearish candle should close below the 50% level of the bullish candle.
The third rule is must to follow. A strong sell signal is formed when the price breaks below the low of the bullish candlestick. This is because it shows sellers are engulfing buyers and are more robust than buyers.
Since candlestick patterns represent market data, they give us insight into how the market is performing. I will explain the scenario where the market forms the evening Doji star.
Its storytime…
When an uptrend unfolds, most market participants are bullish and believe the bullish trend will continue.
As more capital enters the market, the uptrend accelerates, and when the market opens the next day, traders and investors are ready to buy and push the market higher. Accordingly, the day turns into a big positive candle representing a break of a critical level/resistance level.
However, after being in an uptrend for quite some time, more and more people are worried that the market has gone too far and will soon bounce back.
A Doji candlestick after a bullish momentum indicates a break in the bullish trend. This means that market makers determine the direction of the market.
The third candle closes below the 50% level of a bullish candle. This means that sellers have beaten buyers and now dominate the market.
The indecision exhibited by the Doji candlestick, along with the down gap followed by the third negative candlestick, indicates that market sentiment has changed and turned bearish.
Retailers placed buy orders after breaking the key resistance level, but the price fell below the resistance level. Now prices are falling, and retailers are losing money. For this reason, the evening Doji star also acts as a fake breakout candlestick pattern.
Best Working Conditions for Evening Doji Star
An evening Doji star cannot reverse the market’s overall trend. Therefore, other technical confluences, such as resistance or supply zones, must be added to validate signals and remove bad trades.
Resistance zone
The price always reverses from the resistance zone. There is a high probability of a bullish trend reversal from the resistance level. However, adding resistance levels with candlesticks increases the likelihood of a trend reversal. Supply zone:
At trade time, the supply zone contains pending sell orders from large institutions. For this reason, most of the time, the price trend reverses from the supply zone, but adding a supply zone confluence to the candlestick pattern increases the probability of a trend reversal.
Using Overbought or oversold conditions
In the Evening Star, we may enter trades only if the market enters the overbought or oversold territory.
The oversold state can be defined in many ways, but here are some of our favourites.
- RSI with lengths shorter than the default value (e.g., 5) is higher than 70.
- The closing price is above the upper limit of the Bollinger Bands
- The closing price is the closing price times the highest barback price.
Remember to apply such conditions to the second candlestick of the pattern, not the last candlestick. This is because the last valid candle marks the beginning of a new trend. In other words, the condition may be true before the trend forms but not after it does. For example, the RSI can top out at 80 on the second candlestick of the pattern but quickly drop lower when the last bearish candle forms. In such cases, you will miss many relevant signals.
Difference between the Evening star and Evening Doji star pattern
These two candlestick patterns have almost the same structure and are associated with the peak of a price uptrend. It signals that the uptrend is coming to an end. Only the candle in the middle makes a difference.
- The evening star candlestick has a small top.
- Evening Doji star has a small Doji candlestick.
Conclusion
Candlestick patterns are great for confirming trend reversals in technical analysis. To create the perfect trading strategy, you should always add confluences to increase your odds of winning. We recommend testing and practising on demo accounts using virtual funds before going live to avoid failure.
