Monday, October 31, 2011

Morning and Evening Star and Abandoned Baby

Morning star becomes formed by three candlesticks. This pattern can be seen at the bottom of a downtrend. It is known as a strong reversal signal.
1. The first candlestick should be a Bearish candlestick with a considerable body.
2. The second candlestick is a small candlestick that is formed lower than the first one. This candlestick can be Bearish or Bullish. In fact Morning star is the second candlestick but we have to have the first and the second candlesticks for a Morning Star signal.
3. The third candlestick is a Bullish candlestick that is formed higher than the second one and its body covers a significant portion of the first candlestick.

This pattern is called Evening Star when formed at the top of an uptrend:
The effectiveness and potency of the Morning Star and Evening Start patterns as reversal signals is dependent on some special factors that you have to considered:
1. The distance (gap) between the morning or evening star with the first and third candlesticks. The bigger gap, the stronger signal.
2. The degree of the coverage of the first candlestick by the third one. The bigger coverage, the stronger signal.
3. The bigger trading volume in the third candlestick than the first one.
Sometimes the Morning or Evening Star is a Doji candlesticks. Again in this case, the most important thing is the gap between the first and third candlestick and the Doji.

Sometimes, the Morning or Evening Star is a very small candlestick with small or no shadows. The gap is so big and even none of the candlesticks shadows cover any part of the Morning or Evening Star. This patterns is called Abandoned Baby which is a very strong reversal signal. Because of the high volatility, this pattern is very rare in the forex market and can only be seen in bigger time frames but it can be seen in the stock market in smaller time frames like one hour.
Abandoned baby can be seen both at the top of an uptrend or bottom of a downtrend.