What is a Morning Star?

A bullish three period candlestick formation that consists of…

• a long red candle followed by…
• a small red or green candle (or doji) that gaps below the close of the previous candle followed by…
• a long green candle (stronger signal if gaps up)

A leading short-term reversal indicator

Why is a Morning Star important?

• The red candlestick confirms that the downtrend remains intact and bears dominate.
• When the second candlestick gaps down, it provides further evidence of selling pressure.
  • The small candlestick indicates indecision and a possible reversal of a trend. If the small candlestick is a doji, the chances of a reversal increase (referred to as morning doji star).
• The third long green candlestick provides bullish confirmation of the reversal.

So how do I use it?

Since morning stars are signals of a potential bullish reversal after a downtrend they are helpful in confirming a significant bottom especially, when found near support. They are most useful in stop-loss placement with stops typically placed just below the completed formation.

Example 1 – EUR/AUD, 2 min (1/23/2009)

In the above example, we have two completed morning star formation which is followed by bullish market reversals.