How To Trade The Evening Star Candlestick Pattern in 7 Steps

I often describe the stock market as a battlefield …

On the battlefield, preparation is key. All my posts tell you to study and arm yourself with knowledge. Take the opportunity now to join your fellow students in the Trading Challenge — to prepare for battle. The evening star candlestick pattern is all about battle.

The story begins in feudal Japan roughly 450 years ago. One of the three great generals to unite Japan, Oda Nobunaga, is attempting to wrest control of fertile rice lands from his enemy. Three rivers and a strong local defensive position stand in his way.

If Nobunaga is to win, his army must cross the rivers. Once they do, momentum will be on their side. But if his army is unable to cross the rivers, it will be a sign of bad things to come.

The army manages to cross the three rivers and he wins the battle. He gains control of new land and more rice — Japan’s hard currency at the time. His legend grows …

… fast forward to the present day …

The scene: Stock market trader, watching the computer screen, looking for the perfect moment to close a long position. Will the stock price continue to run? Or will there be a bearish reversal?

If the bulls win the battle, the trader can hold the position for more profit — like Nobunaga winning the battle in ancient Japan. But if the bears win the day, then it’s time to close the position and walk away.

A sign appears on the chart in front of the trader — the three rivers evening star candlestick pattern. The trader knows the chances of overcoming resistance is slim. Goals already met, it’s time to exit the position.

The trader places a sell order. Moments pass. The order executes and the trader leans back, thankful for the push to study patterns. Seem overly dramatic?

In my opinion, learning patterns is foundational. The names of Japanese candlestick patterns hint at emotional turmoil and refer to legends. It makes them fun to learn. But it goes deeper than the names and the stories.

As a trader, learning these patterns teaches you about market psychology. The battle between bulls and bears is a psychological battle. Arm yourself and you could walk away victorious. But failure to understand the patterns doesn’t bode well.

Download the key points of this post as a PDF

What is the Evening Star Candlestick Pattern?

A star candlestick is a reversal pattern. It signifies the momentum of a recent trend is slowing. The evening star candlestick pattern is a bearish reversal. Upward momentum, controlled by the bulls, begins to lose steam. The star is a period of balance between bulls and bears with little price movement. Then momentum shifts and the bears gain control.

I’ll show you an example on a real chart, but first take a look at the graphic. It gives you the characteristics of the evening star candlestick pattern.

evening star candlestick pattern

The first candlestick has a long body and is bullish — price closes higher than it opened. Then, in the ideal evening star pattern, there is a gap up to the second candlestick. This is the star.

The star signals a slowdown in momentum. It either has a short body (called a spinning top candlestick) or no body (called a doji candlestick). It can be either green or red. The main thing to understand is there’s a balance between buyers and sellers.

The third candlestick is bearish — the opening price is higher than the closing price. The ideal evening star gaps down from the star to the third candlestick. The third candlestick finishes sharply into the first candle body.

Note: in the evening star pattern you pay more attention to the candle body than the shadow. Shadows are the lines extending above and below the candle body. They represent the trading range for the period. The candle body represents the open and close prices. A green candle closed higher than it opened. A red candle closed lower than it opened.

Benefits of the Evening Star Candlestick Pattern

All the star patterns (yes, there are others, including the morning star) are reversal patterns. They all represent a stalemate between buyers and sellers. The benefit to you as a trader is that they are predictable.

A word of caution before we look at a real-life example: This is not an exact science. It’s based on experience and study — but that doesn’t mean it happens every time. You need to study!

One more word of caution: When you look at charts in different time frames, you might not see the same pattern.

I used a 1-minute candlestick in the chart example below. When I looked at the 2-minute candlestick for the same chart, the pattern was different. It was a bearish engulfing pattern — another reversal pattern. It confirmed what I was seeing in the 1-minute candlestick chart.

The lesson to be learned by using different candlestick periods: perspective can make a huge difference in stock charts.

Let’s look at the evening star candlestick pattern on a real chart…

Evening Star Candlestick Pattern Example

Look at the Boxlight Corp. (NASDAQ: BOXL) chart below. The three candlesticks in the yellow rectangle are the evening star pattern.

The first candlestick has a long body and is bullish. The second candlestick is short and in this case, it’s green, or bullish.  The third candle reverses the trend, finishing sharply into the body of the first candlestick.

BOXL evening star
BOXL chart: evening star candlestick pattern; 1-minute candles

The classic evening star pattern has a gap up between the first and second candle bodies. You see this in the chart above. An ideal evening star would also gap down between the second and third candle bodies.

In the BOXL chart example, there’s no gap down. Don’t be concerned or confused by this minor detail. The perfect gap up and gap down is rarely evident and not necessary for the success of the pattern. This is especially true of intraday charts.

Steve Nison, author of “Japanese Candlestick Charting Techniques,” makes the above point clear in his book. Nison brought Japanese candlestick charts to the West. The book is a classic and well worth your time if you want a better understanding of candlestick charts.

Importance of Stock Indicators

Many traders use Western-style technical indicators in conjunction with patterns. Together they can provide powerful information to guide your trading plan. One of the most common indicators to use along with the evening star candlestick is the relative strength index (RSI).

RSI Indicator

The RSI indicator measures momentum to determine whether a stock is overbought or oversold. Either overbought or oversold conditions, as measured by RSI, signal a likely reversal.

There are two reasons to use RSI with evening star trading. First, to check daily RSI levels for an overbought condition. Then, once you’ve changed the time frame (step #4 below), use RSI to confirm the reversal.

How To Trade The Evening Star Candlestick Pattern in 7 Steps

By now you might be wondering if evening star trading is for you …

Let’s put this in perspective. If you hang out looking for evening star candlestick patterns to trade you could be waiting a while. It’s a pattern that happens sometimes. It’s good to recognize it and even have a plan for what to do when you see it …

… but I wouldn’t call it a trading strategy. If you’re ready to develop a strategy, take the time now to apply for the Trading Challenge.

While you’re waiting for your application to be reviewed, here’s one way to trade the evening star when you do see it …

#1 Set the Right Graph Time Frame

Setting the right time frame depends a lot on your trading strategy. I hope this is clear to you. You can (and should) change the time frames I’m giving you to suit your trading strategy. You should practice with paper trading to test your thesis.

For the sake of understanding evening star technical analysis, let’s imagine you’re looking at a longer-term chart. Say, a 1-year chart with 1-day candlesticks. The reason you’re starting with the longer-term chart is to get a big picture idea of price action.

#2 Get To Know The Open, High, Low, and Close Prices

If you look at a chart with 1-day candles, you’re essentially doing just this. You’re looking at the daily open and close prices (the candle body) and the high and low prices (the shadows or wicks). In case you’re new to candlesticks, the graphic below explains it.

bullish and bearish candlesticks in technical analysis
How to read candlesticks.

To recognize an evening star chart, you need to be familiar with the above graphic. For that matter, to understand price action on any candlestick chart, this is basic knowledge. Study up.

#3 Wait for The Daily RSI to Cross Above 70

A lot of traders consider an RSI cross above 70 to be a clear overbought signal. It’s a common strategy used by forex (foreign exchange) traders. Let’s go back to the BOXL chart but add in the RSI indicator.

Below is the 1-year chart with daily candlesticks. I’ve put a rectangle around the daily RSI above 70 and where the evening star appeared on the previous chart.

BOXL chart with RSI
BOXL chart: 1-year, daily candlesticks; with RSI

#4 Downgrade the Time Frame

Once you’ve identified the overbought condition (RSI above 70) on the longer term chart, it’s time to zoom in. One of the most common time frames for this is the 5-minute candlestick chart. Many traders like the 5-minute candlestick because it’s neither too fast nor too slow.

I want to reiterate the difference in charts when looking at different time frames. While downgrading the time frame to the 5-minute chart is one way of playing this, it’s not set in stone. As I said above, the evening star did not appear in the 2-minute candlestick for BOXL. It also didn’t appear in the 5-minute candlestick chart.

For the sake of continuity with our example, let’s go back to the BOXL 1-minute candlestick chart and add the RSI. I’ve put a horizontal line across the RSI at 70 (pink). Notice, in this case, the RSI actually goes above 80.

This can happen when you shorten the period. Remember the RSI is calculated using a certain number of periods — 14 is most common. The shorter time frame on this chart magnifies price action in the RSI.

Looking at the chart, follow the vertical yellow lines up the chart to the candlesticks. Notice the pullbacks right after RSI peaks? The RSI gave the ‘overbought’ signal when it moved between 70 and 80. Both times (the second is our evening star) the price pulled back.

BOXL RSI above 70
BOXL chart: 1-minute candlestick with 14-period RSI rising above 80

#5 Short Selling

Short selling is when you borrow and instantly sell shares of a stock. You borrow at a high price and expect the price to drop. Assuming the price drops, you then buy shares at a lower price to pay the shares back to the broker. It’s how a lot of traders make money in a downtrending market or on a downtrending stock.

Since the evening star candlestick pattern signals a bearish reversal, it seems logical to use it to identify a short play.

Here’s how it would work: You keep an eye on price movement for the stock you want to short. Depending on the time frame you’re using, you watch for the stock to rise and for the appearance of a star. When the star appears you don’t jump in right then. Nope, you wait.

Why do you wait?

Because you want to confirm the reversal first. Shorting can be a very risky strategy. I like to use it when conditions are right. But it’s not for beginners and it requires a lot of study. Back to short selling the evening star…

You need access to shares to short. Not all brokers do this and there are rules. Make sure you know exactly what you are doing. Have a plan. The key is you have the shares available to short. Then, wait until the third candlestick confirms the pattern. Finally, sell and wait for the price to drop.

But what do you do if the price reversal doesn’t pan out?

You know my #1 rule: Cut losses quickly. When you short, you lose money if the share price rises above your entry price. This is because you pay more for the shares needed to close your position.

So, what you do is establish a stop loss …

#6 Establish a Stop Loss

A stop loss is when you pre-set an exit price if the trade goes wrong. Stop losses can be set electronically, but I’m not a fan. I’d rather set a mental stop loss. The reason is, if the price moves too fast, your stop loss can get passed by. This is called slippage.

If you use a mental stop loss, you can make adjustments. You can find the best available price to buy shares and close your position. In a short position, your stop loss is higher than your entry price.

For example, you see the evening star pattern and short 500 shares at $1 each. But instead of continuing to drop, the price goes up. You decide to cut losses quickly. Your mental stop loss is at $1.05 per share. You buy the shares at $1.05 and close your position. You lose $25 (500 shares x $.05 per share lost = $25).

Now, if you get caught in a short-squeeze with an electronic stop loss, you could lose a heck of a lot more than $25. So predetermine your mental stop loss and then stick with it. If there’s some slippage past your stop loss, get out as soon as possible.

Assuming everything goes well, when do you close your position? Some traders say you should wait until the RSI drops below 30. I’d rather you had a clear trading plan going in and stick to it. That may or may not involve further use of the RSI.

Now it’s time to …

#7 (Hopefully) Take Your Profits!*

If your trade went well, enjoy the reward. Remember, my results aren’t typical. This isn’t investment advice. Be aware you can lose money. Do your own research and seek the advice of a professional.

Key Tips on Trading the Evening Star Candlestick Pattern

Use a Stock Screener

But don’t use any old stock screener. Of course, if you’re just starting you can use something free like Yahoo Finance, Market Watch, or even FreeStockCharts.

But when you’re ready to get serious about a stock screener, there’s no better choice than StocksToTrade.

Every day I’m amazed and grateful for this platform. It has all my favorite screens built in (I even helped design the platform), but you can set custom screens to match whatever it is you’re looking for.

If you’re wondering why you should pay for a stock screener, let me lay it out very simply. The free stock screeners have a delay between the data being generated and being delivered. If you’re going to day trade you need real-time access. Simple as that.

Plus, you get better tools all around — including access to over the counter markets (OTCMKTS) data. Not all screeners have this.

Stick to Your Trading Plan

You have a trading plan, right? I keep saying this over and over.

Why?

Because there are a limited number of patterns and a limited number of things you need to put in your plan. If you get on it and learn them, you can start creating a trading plan. Then, when the time comes to trade you’ll know exactly what you’re going to do in any situation.

That’s power!

Never Stop Learning

This is the most important part of this entire post. Do you understand why?

You can learn patterns like the evening star candlestick pattern. You can learn setups and risk vs. reward. You can learn all the things you need to learn to make a single trade. But trading is a vast subject and we are all individuals.

I have students who trade completely different than I trade. I like to keep things simple with setups like the first green day. But I have students who love to short. I have students who study lots of technical indicators like the MACD or the RSI. Some are trading small accounts and a few are trading massive accounts.

As you change and grow, what you need to know to be successful changes. It’s kinda like being rich. Nobody tells you how to act and behave and ‘be’ once you have wads of cash. It’s a learning curve.

An excellent way for you to keep learning as a trader — starting today — is to apply for the Trading Challenge.

The Bottom Line

The evening star candlestick pattern signals a reversal from a bullish to a bearish trend. Traders identify this pattern and use it to determine exit positions on long trades and entry positions on short trades. Study up!

Are you a trader? Do you use the evening star candlestick pattern when you trade? Comment below and let me know how it works for you. New to trading? Comment below and let’s get you going in the right direction!

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