Since candlesticks are the basic building block of most technical analysis, the ability to recognize different candlestick patterns is a crucial trading skill.
First though, let’s start with a definition.
What Is a Star Pattern?
A star pattern is a 3-candlestick formation that may signal a reversal. It is made up of a large candle moving in the direction of current trend, a short candle, and another large candle that moves in the opposite direction of the first (and trend).
The star candlestick pattern has both bullish and bearish variations, called morning stars and evening stars, respectively. It is also very similar to the doji star and abandoned baby patterns. For all of these patterns, the middle candle is essentially the apex of the potential reversal.
Of course, no candlestick pattern guarantees a particular outcome. Instead, they offer clues as to what is going on in the market.
So the question is, what does a star really tell you?
What Star Patterns Mean
Like many candlestick patterns, the name itself doesn’t reveal much.
And unlike some, English speakers do not use the Japanese name for it. The “star” part probably comes from how the pattern looks. The small candle is reminiscent of a twinkling star (or something like that).
In trading terms:
- During the first period, the price drove strongly in the same direction as the overall trend.
- During the second period, neither side was able to maintain control.
- During the third period, price drove strongly in the opposite direction of the first period and trend.
This sets the stage for reversal, as it appears the current trend may be reaching exhaustion.
How To Recognize Star Candlestick Patterns
Traders are attracted to patterns partly because they are easy to spot.
However, it’s also easy to see things on the charts that aren’t truly there (or anticipate events that never come to fruition). That’s one of the reasons why waiting for confirmation is so important.
Technically, a star pattern must:
- Begin with a long candle moving with trend
- End with a candle of similar size moving against trend
- Have a short candle as the second candle
- Contain no gaps
In practicality though, many traders will make various exceptions.
- The first and third candles can be different lengths, as long as they are both long line candles and/or test important price levels.
- There can be more than one short candle between the first and final candlestick.
- There can be one or more gaps, as long as the overall structure remains the same.
Depending on who you ask, any of these standards may be more or less important. Moreover, some of these variations may be more properly classified as other reversal candlestick patterns, such as doji stars or abandoned babies.
Remember, identifying the reversal itself is more important than labeling the formation. That’s not to say these standards are completely unimportant (as we’ll touch on shortly). It’s just to say that the implications are more important than the criteria.
In other words, you need to put it into context.
Where Stars Fit in the Chart Narrative
The markets are often characterized as a battle between the bulls and the bears.
Star patterns show that one side attempted to press their advantage on candle one stalled on candle two, and finally surrendered all the momentum on candle three.
On the chart, it looks like a U-turn.
It might happen like this on a daily time frame:
After a strongly trending day, traders awoke the next day unsure which way things were going to go. The day was filled with give and take but ultimately finished without either side gaining much ground. On the third day, counter-trend pressure resulted in a powerful drive against trend throughout the day.
In the short-term, it amounts to a counterpunch.
The question traders need to ask themselves is, “Will this lead to sustained reversal, or is it just short-term relief for the opposing side?”
To answer that question, you’ll need more than just an understanding of Japanese candlesticks and candlestick patterns. You’ll want to analyze both within the context of greater chart patterns as well as trend and price levels. You’ll also want to make use of your own chart markup and indicators.
Analyze the history of your preferred asset(s) with respect to Star patterns and apply it to your own trading style.
Now, you can test (and/or stretch) the criteria we mentioned above to find the most tradeable opportunities. For example, you may find that stars where the second candle is less than 20% the size of the first candle may play out more reliably than those without. Or, you may find something else entirely.
Here is where the story in the charts begins to come into focus.
This is what we call technical analysis.
How To Trade Star Patterns
Reversal points are great places to enter or exit trades.
Star patterns serve as easy-to-spot signs of potential reversals—and may even lead to longer-term tops or bottoms when found on higher time frames.
Generally, you can put more weight into multi-stick patterns than single candles. They give you more information over a longer amount of time. Still, it is considered unwise to trade based on candlestick patterns alone. They rarely have extremely high hit rates by themselves.
You need additional points of confluence to shift the probabilities in your favor.
Some of the more important ones include:
- Volume – Reversals are often accompanied by elevated trading volume. For star patterns, be on the lookout for it on the second and (especially) the third candles.
- Price Formations – Reversal patterns like the star often form near important price levels or trend lines, leading to a bounce at support or rejection at resistance.
- Oscillator Shift – Oscillating indicators like the RSI or stochastics are commonly used to identify reversals by analyzing slope, percentile, and/or divergence.
The fewer such factors corroborating the reversal, the less confident you can be about it.
It would be difficult to form a comprehensive trading strategy around star patterns. There simply isn’t enough there to develop a strong edge. Even with a great understanding of trading math, orders, psychology, risk management, options, and automation, you’d still have a hard time.
You’re much better off building your strategy around other tools then using reversal patterns as an additional point of confirmation.
Patterns like the star are much better idea givers than trade makers.
Other Candlestick Pattern Types
The star is but one of many candlestick patterns.
You’d be wise to get familiar with all of the other ones too.
- Abandoned Baby
- Counterattack Line
- Doji Star
- Engulfing
- Harami
- Harami Cross
- In Neck
- Mat Hold
- On Neck
- Three Inside
- Three Methods
- Three Outside
- Tasuki Gap
- Tweezers
- Windows
Sure, there are quite a few of them. But don’t let that intimidate you.
It’s unnecessary to memorize all the names and criteria for every pattern. What’s more important is to learn the principles of price action and technical analysis.
In fact, you’re free to forget all of the names and specifications as long as you can look at a group of candlesticks and understand what they are trying to tell you.
Takeaways
To review:
Stars are a type of candlestick pattern that signals a potential reversal. While not a guarantee, their appearance may indicate that market conditions are changing. Thus, they can help you find winning trades.
Of course, there are other candlestick patterns that you should learn about. And even so, the ability to recognize patterns is not enough to trade successfully on its own.
Nonetheless, you’ve now added one more tool to your toolkit.
Have questions or more information to add? Contribute to the conversation in the comments below! Or, if you know someone who could benefit from this post, share it with them. You can also check out our Candlestick Patterns Guide to improve your candlestick analysis skills.