Star patterns in Japanese candlesticks are single-candle formation that look like the twinkling stars that we all are familiar with. Stars have small real bodies and they gap away from the previous candlesticks. In other words, the star candlestick’s real-body does not overlap that of the previous candlestick. This gives rise to the illusion that these small-bodied candles are floating in the sky.
The candlestick stars can be either white (bullish) or black (bearish) in colour. Stars taken in isolation do not have too great a significance. They imply indecisiveness; that the investors are beginning to doubt the strength of the prevailing trend. A long white or dark-bodied candlestick typically occurs before the star candlestick. These stars combine with other candles to form various candlestick patterns such as morning star, evening star, doji star and shooting star. A look at the morning and evening star candlestick patterns.
Morning star: This is a three-candle reversal setup. Morning star is a bottom reversal pattern, bullish in nature. The pattern occurs after at the end of the downtrend. The first candle is a long dark real-body and the second is the star signalling uncertainty. The third candle is a real white one that covers at least half of the first candle. These three candles do not overlap on each other. Refer to the daily chart of GVK Power and Infrastructure for morning star candlestick pattern. From Rs 21, the stock tumbled to Rs 12. After a long dark candlestick around this level, the stock gaps down shaping a star. The bulls take control later on and the stock reverses direction. The uptrend of the stock continues to Rs 25.
Evening star: It is a top reversal three candle pattern, which is a bearish reversal. This pattern happens after a continued uptrend. The first candle is long white real-body and the second is the star, indicating indecisiveness. While the third candle is a real dark candle that eats al least half of the first candlestick. The three candles do not overlap on each other. Infosys illustrates evening star candlestick pattern.
Following an upmove from Rs 1,300 to Rs 2,000 (from March to June 2008), the stock formed an evening star candlestick pattern. One can observe that after a long white candlestick, the stock gapped up next session forming a small real-body (star). Subsequently, the stock changed its trend, completing the evening star pattern.
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