Contrary to morning star, the evening star is bearish and it appears at the top end of an uptrend. It evolves over three trading sessions. This pattern is formed by combining three candlesticks.
Understanding Evening Star
The three prerequisites for the formation of the evening star are
• The first candle should be a bullish candle
• On day two the candle should be doji or spinning top with the gap up opening.
• On day three the candle should be a bearish candle with a gap down opening. Besides, on the third day the current market price of the stock at near closing time should be lower than the opening price of the stock on day one.
Once an evening star is validated it is better to go short for various reasons. In this situation the market is in an uptrend and the bulls are in absolute control. In an uptrend market the stocks reach new highs.
On the second day of the pattern, the market opens with a gap up opening reconfirming the bulls presence in the market. However, despite the positive opening the stock closes by forming doji candle.
On the third day, there is a gap down opening and red candle is formed. The long red bearish candle indicates selling activity. This creates panic among the bulls.
As the bulls will continue to panic over the next few trading sessions, one should go short. The risk takers can initiate trade on the last day and the stop loss for the trade will be the highest high of all three days. (The author is a homemaker who dabbles in stock market investments in free time)