Evening Star Trading Strategy –
An Easy 6 Step Strategy
The Evening Star chart pattern strategy is a simple yet a very powerful Forex reversal strategy. The
Evening Star strategy can be broken down into six easy steps. We also have an unorthodox way of
reading the price action pattern and from here comes our edge.
The Evening Star chart pattern is a common pattern not just in the Forex currency market as this pattern,
can appear in the stock market, commodity markets or any other markets. The Evening Star chart pattern
is really a minimalist chart pattern.
Now, let’s turn our focus back to how to correctly identify and trade the Evening Star chart pattern.
First, let’s define the Evening Star chart pattern.
What is the Evening Star Chart Pattern?
In technical analysis, the Evening Star chart pattern is a three candlestick bearish reversal signal. The first
candlestick is a long bullish one followed by a second candlestick which is a small candle representing
indecision in the market and the third one is a long bearish candlestick that breaks below the low of the
middle candle – or the star candle.
The middle candlestick needs to have a short real body followed by small wicks as well.
Figure 1: Evening Star Candlestick Pattern
The signal gets stronger if the third candlestick is a bearish engulfing candle meaning that it closes below
the first candlestick open price.
From a psychological point of view, the Evening Star chart pattern is signaling that the bullish momentum
is slowing down. This can be an early indication that the smart money are starting to sell, but only a break
of the low can confirm the Evening Star chart pattern.
This is a bearish reversal signal so we would only look for this pattern to appear at the end of a bullish
trend.
Now…
Before we move forward, we must define the indicators you need for the Evening
Star chart Pattern
The only indicator you need is the:
RSI Indicator is a momentum oscillator indicator that calculates the speed and change of price
movements. The RSI is ideal for spotting overbought/oversold conditions in the market.
Trading the Evening Star chart pattern in combination with the RSI indicator is the ultimate symbiosis for
spotting turning points in the market. The RSI indicator should be easily located on most trading
platforms under the Indicators library.
Figure 2: RSI Indicator
Please allow me to quickly tell you how to use the RSI indicator and how to interpret the information
given by this amazing indicator so you can know what you’re trading. When the RSI line is touching the
70 level, we’re in the overbought territory; conversely, when the RSI line is touching the 30 level, we’re
in oversold territory.
Please have a look at the chart example below to see how to use the RSI indicator.
Figure 3: How RSI Indicator Works
Now, it’s time to get back our focus to the Evening Star chart pattern strategy and lay down the six steps.
Don’t forget to take a piece of paper and a pen and note down the rules.
Let’s get started…
Step #1: Wait for the Daily RSI to cross above 70
No matter what type of trading strategy you employ it’s always best to trade with an eye on the Daily time
frame. By analyzing the market on multiple time frame we increase the odds of success as we have a
more accurate reading of the actual price action.
Figure 4: EUR/USD Daily Chart
This brings us to step #2:
Step #2: Downgrade the Time Frame Down to the 5-
Minute Chart and Wait Until the Evening Star chart
pattern appears on the chart
We lower our time frame down to the 5-minute chart. We want now to utilize the lower TF to better time
our entry. The 5-minute chart is ideal for scalping the market as it’s not too fast and at the same time not
too slow.
We also want to see the Evening Star chart pattern developing on the 5-Minute time frame. It is sufficient
to wait just for the first two candles of the Evening Star pattern.
Remember, we need the first candle to be a big bullish candle followed by a second candle with a small
body. In the figure below you can see the inception of the Evening Star pattern:
Figure 5: EUR/USD 5-Minute Chart
Before looking for the completion of the Evening Star pattern, we also want to make sure the bullish trend
is exhausted.
Which brings us to the next step.
Step #3: Check if the RSI Indicator is Above the 70 level.
We want to make sure that the Evening Star chart pattern is confirmed again by the RSI indicator. This is
a crucial part of the Evening Star chart pattern strategy that we don’t want to neglect. The Evening Star
pattern appears in the market quite often so we don’t want to randomly trade every instance when it
appears because that’s a recipe for disaster.
As we mentioned before the Evening Star works best when used with the RSI indicator.
Figure 6: EUR/USD 5-Minute Chart – RSI Indicator
So far, so good, but still we haven’t answered the most important question that a trader has:
When to enter?
Step #4: Entry SHORT once the Star Candle Low is Broken
to the Downside
From a psychological point of view, the Evening Star chart pattern is signaling that the bullish momentum
is slowing down. This can be an early indication that the smart money are starting to sell, but only a break
of the low can confirm the Evening Star chart pattern.
Figure 7: Evening Star Pattern – Sell Entry
At this point, our short position was triggered, but we need a place to hide our protective stop loss and a
level where we can take our profits, which brings us the next step of our Evening Star chart pattern
strategy.
Step #5: Place Protective Stop Loss 5 pips Above the High
of the Star Candle
We want to hide our protective stop loss just above the highest level of the middle candle. In order to
avoid getting whipsawed on a false breakout, we want to add a 5 pips buffer to our SL as extra protection
not to get stopped out too early.
See figure below:
Figure 8: Evening Star Pattern – Place Stop Loss
Knowing when to take profit is as important as knowing where to place your SL, which brings us to the
next step:
· Step #6: Take Profit Once the RSI Breaks Below the 30
level.
The Evening Star chart pattern strategy looks to capture as much as possible from the new trend and the
logical point to take profits should be once the RSI indicator reaches the oversold territory. We want to
take profits as soon as the RSI oscillator breaks below the 30 level.
See figure below:
Figure 9: Evening Star Pattern – Take Profit
Note** The above was an example of a SELL trade using the Evening Star chart pattern. Use the
exact same rules for the Morning Star chart pattern which is opposite to the Evening Star for a
BUY trade. In the figure below you can see an actual BUY trade example, using the Evening Star
chart pattern strategy.
Take a look:
We’ve applied the same Step #1 to help us identify the directional bias followed Step #2 through Step #6
to trigger our BUY trade (see next figure).
Conclusion
The Evening Star chart pattern strategy is a great reversal strategy that proves that you can still find
successful Forex trading strategies. All that matters is to know how to correctly look at the price action
and more important to exercise discipline and only trade when all factors come together and signal a
trade.
Thanks for reading!
-The Team @ TMP
