Morning Star Pattern: How to Identify a Bullish Reversal in Crypto

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The Morning Star is a candlestick pattern that works well in every financial market as a typical bullish pattern. Most price action traders use this pattern to identify the potential buying point of a trading instrument. 

Candlestick trading is commonly used in the cryptocurrency market; not only it helps traders to assess the market trends, but the implementation of modern candlestick charting on most trading platforms also makes them extremely accessible. Still, the cryptocurrency market is new and still emerging, compared to the traditional forex (FX) or stock markets, where investors face a lack of sufficient previous data important for using candlestick analysis. However, for most of the top-tier crypto coins, there is a fair amount of historical data available so that you can easily apply candlestick analysis to it. 

The morning star candlestick is usually used for technical analysis as it provides similar price action to other formations, such as hanging man, doji, and evening star. 

Without further ado, let’s get down to the nuts and bolts of the morning star pattern in the cryptocurrency market.

What Is the Morning Star Candlestick Pattern?

A morning star pattern is a bullish reversal pattern that appears at the bottom of a downtrend. It indicates that sellers have lost their momentum, and buyers have taken control over the price in an uptrend.

It is a combination of multiple candlesticks with a U-shape, indicating a shift in the trend direction. This pattern is very effective when the price moves down for a considerable time, but a reversal of momentum seems at hand. 

The morning star candlestick pattern is a combination of three candles with the following characteristics:

  • Day 1: A large bearish daily candle at the bottom of a downtrend.
  • Day 2: A small candle, either bullish or bearish.
  • Day 3: A large bullish daily candle.
A morning star candlestick.
The image represents what the morning star pattern looks like.

Characteristics

Usually, the ideal morning star reversal pattern develops at a significant support level or at the bottom of a downtrend, which provides the maximum accuracy for going long. This is because the financial market moves like a zigzag by creating swing lows and swing highs. 

Whenever the price moves back from the swing level, it leaves some signs that the prevailing trend is about to end and a new trend is about to start. The same theory applies to the morning star pattern. 

This pattern represents a story about the market in which buyers remain active in the price on Day 1. On Day 2, the price opens with a downward gap, indicating that sellers are still active and aggressive. However, the sellers barely make a new low at the end of the day, pointing out that they’re losing momentum. This is the primary sign of an upcoming morning star pattern. A strong bullish candle appears on the third candle, eliminating the bearish price action of Day 2.

The anatomy of the formation of morning star pattern.
The formation of the morning star pattern.

The above image shows the exact formation of the morning star pattern in the price chart. Day 3 opens with a bullish cap and closes higher above Day 2. Some common aspects of this pattern are as follows:

  • The morning star is a bullish pattern that appears at the bottom of a downtrend.
  • A morning star pattern from a strong support level has the maximum probability of working out.
  • If the Day 3 candle is more significant than Day 1, the pattern is more robust.
  • Day 2 should open with a bearish gap, and Day 3 should open with a bullish gap.

How to Identify a Morning Star on Crypto Charts

In the above section, we’ve seen how the morning star pattern develops within three days. Now let’s move to identify this pattern in any financial market.

Identify the Bottom (Ending of a Bearish Trend)

At first, you have to find a bearish trend that’s easy to spot on the chart by observing lower lows in the price. However, finding the bottom is essential. In this case, the bottom means the last part of the bearish trend from which bulls may regain momentum.

You can define the bottom using horizontal or dynamic support. You don’t have to wait for confirmation from the support level. Instead, start monitoring the price as soon as it reaches the support level.

The support line in a downward trend.

The above image shows the price moving downward (downtrend) and reaching a horizontal support level. We can therefore say that the price may have found a bottom. Moreover, you can use dynamic support like 20 EMA to identify the bottom. If the gap between the dynamic 20 EMA and price extends, the price has a higher possibility of making a bottom and then reversing.

Find The Three Candles

As soon as the price reaches the bottom, we should find three candles as discussed in the above section. Here the second candle should be smaller than the first candle and should open with a bearish gap. However, the gap is not mandatory. This is because, in some cases, the price may open without a gap due to less volatility in it.

If the second candle’s body remains within 50% of the first candle’s body, we can consider the pattern to be valid. But the most important part of all is the third candle.

The third candle of a morning star pattern that signal an upcoming bullish pressure.

The third candle should appear with an impulsive bullish pressure, eliminating the price action of the second candle. We can define the probability of the trade by looking at the third candle as follows:

  • If the third candle is more significant than the first candle: high probable trade.
  • If the third candle is as same as the first candle: medium probable trade.
  • If the third candle is lower than, or similar to, the second candle: crucial probable trade.

When three candles appear with these conditions, we can consider the pattern to be valid.

How to Spot Bullish Reversal Pattern Using the Morning Star

This section discusses the strategy to identify the morning star pattern in the cryptocurrency market using a real chart. 

Previously, we’ve seen that the morning star is a bullish pattern that appears after a strong bearish trend. Therefore, at first, you have to find a selling market that moves down for a considerable time:

The first stage of morning star formation in a BTCUSD chart 
with downtrend.

The above image is a BTCUSD daily chart in which the price moves down from $62,000 to the $51,912 event level, with a bearish pressure. First, however, look at the daily bearish candle that hits the event level. It’s smaller than the previous candle and opens with a gap. 

Now let’s look at the image below:

Bullish daily candle of BTCUSD chart.

Here we can see a strong bullish daily candle that eliminates the previous day’s selling pressure and closes the candle above Day 1’s high. If we compare the last 3 days’ candle formation with the conditions for the morning star pattern, we see that they’ve matched. 

Look at the image below to see what happens next:

Bullish price reversal after the morning star pattern.

We can see that the price moves higher from the morning star pattern, ultimately breaking above the previous swing high. 

Next, we’ll look at how we can open a buy trade using the morning star pattern. 

The aggressive approach is opening a buy-stop order above the third candle’s high, with some buffer. Here, the third candle indicates that buyers have entered the market by eliminating all the selling pressure. Now buyers are ready to take the price higher by creating new and higher highs. Therefore, putting a buy-stop order will automate the entry once the price moves higher on the next day. In that case, the ideal stop loss will be below the second candle’s low, with some buffer.

The buy-stop order using the morning star pattern as an indicator.

The above image shows how the buy-stop order works, providing a 1:1.8 risk-to-reward-based profit. 

Another approach is the conservative one, in which traders wait for a correction before opening the buy trade. In that case, they can open a buy trade from a 30% or 50% correction of the third candle’s body instead of buying from the candle’s high. 

The conservative approach has a better risk-to-reward ratio than the aggressive approach, but there is a possibility of missing out on the trade. In addition, there’s no guarantee that the price will correct lower after forming the morning star pattern. Therefore, the optimum approach is opening the 50% position with the aggressive approach and another 50% position with the conservative approach.

Morning Star vs. Evening Star: The Differences

The evening star is another similar technical indicator but signals bearish reversal momentum. The evening star forms at the top of a price uptrend, signifying that the uptrend is nearing its end where the potential reversal (bearish sign) is approaching. The key highlight to the evening star is the ideal pattern rarely appears in technical analysis. If it does, the signal is usually reliable, and a strong downtrend is on the way.

We’ve illustrated the evening star pattern in the image below.

An evening star pattern formation.

The evening star pattern is a combination of three candlesticks with the following characteristics:

  • Day 1: A large bullish daily candle at the top of an uptrend.
  • Day 2: A small candle, either bullish or bearish or neutral (Doji)
  • Day 3: A large bearish daily candle

Now let’s move to the key differences between the morning star and evening star candlestick patterns: 

Morning StarEvening Star
Appears at the bottom of a downtrend.Appears at the bottom of an uptrend.
A combination of three candles: bearish, bearish/bullish/neutral, or bullish. A combination of three candles: bearish, bearish/bullish/neutral, or bullish.
Morning star indicates that sellers have failed, and buyers are dominating the market. Evening star indicates that buyers have failed, sellers are dominating the market.
From a significant support level, a morning star pattern indicates the potential for traders to open long positions.From an important resistant level, the evening star pattern tells traders to short a position.

How Reliable Is the Morning Star Pattern?

Morning star is a powerful candlestick pattern, and most price action traders use it in their trading strategies. However, in financial trading, no pattern can guarantee you a 100% profit. Nevertheless, this pattern is very effective from the bottom, and it represents a story about the market regarding buyers’ failure and sellers’ presence. As a result, traders can easily understand what’s happening in the market — and make an informed guess as to what may happen next. 

Moreover, its reliability depends on how candles are forming. If the third candle eliminates the price action of the first and second candles by engulfing the price action, we can consider the buying possibility to be strong. 

However, the morning star pattern has a lower possibility of working out from a random place because there is no way to say that the current trend has weakened. Therefore, the morning star success rate depends on the price trend, levels, candle formation, and market sentiment. Therefore, traders should consider other factors besides the candlestick pattern to increase its probability of success. 

Even if you have a maximum probability of trading, there is a possibility of failure in using this pattern. Therefore, make sure to follow a risk management system and always use stop loss in every trade.

The Limitations

Like other candlestick patterns, the morning star has some limitations. Let’s have a look at them:

  • The morning star, a combination of three candlesticks, is often difficult to find on a chart. If the price changes the trend direction before three days have elapsed, there’s a possibility of missing the trade.
  • There is no guaranteed movement. Even if you follow all the rules, there’s a possibility of hitting the stop loss.
  • Trading in the daily or weekly chart requires a lot of patience and effort to find the setup.
  • In volatile market conditions, there’s a high probability of being stopped out at breakeven.

Closing Thoughts

A valid morning star pattern is one of the most reliable technical indicators indicating a bullish reversal after a long bearish trend. Although this pattern is very effective, traders should do extensive research and practice in a demo account to test the pattern’s effectiveness. Another thing that a trader may consider is the risk associated with the financial market. 

Since the cryptocurrency market is very volatile, with the possibility of uncertainty at any time. A sudden market crash and a strong upward and downward trend can happen in a split second. Therefore, always stay discipline with your risk management strategy as even the most perfect candlestick formation can’t predict the future. For a best result, always confirm the chart patterns with the trading volume other technical indicators like the relative strength index (RSI indicator).

Disclaimer

This article is intended for and only to be used for reference purposes only. No such information provided through Bybit constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific person. These forecasts are based on industry trends, circumstances involving clients, and other factors, and they involve risks, variables, and uncertainties. There is no guarantee presented or implied as to the accuracy of specific forecasts, projections, or predictive statements contained herein. Users of this article agree that Bybit does not take responsibility for any of your investment decisions. Please seek professional advice before trading.

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