Morning Star (Sao Mai) is a reversal pattern appearing very often in the forex market. Therefore, to avoid missing out on trading opportunities when encountering this pattern, you need to know how to identify and use them accurately and clearly. In this article, we will help you get there.
What is Morning Star?
Morning Star (Sao Mai) is a cluster of 3 reversing candles at the bottom with a long falling candle, a short body candle and a strong bullish candle. This could be a variant of Bullish Engulfing or an extended version of Bullish Harami.
Stars appear at dawn, rising from the horizon carrying energetic energy for the new day. Similarly, Morning Star models appear at the beginning of the uptrend and promise a strong reversal in the future.
Features of Morning Star
In the forex market, you can rely on the following characteristics to identify the Morning Star model:
- The current trend must be bearish because this is a reversal pattern from bearish to bullish
- The first day must be a long one, showing a strong continuation of the trend
- The second day must have a small body, possibly a Doji. This candle can increase or decrease steadily.
- The third day must be a bullish candlestick, indicating strong buying power that supports the price.
The Morning Star is shaped like a U and is a visual candlestick, without specific calculations like how tall one candle is to determine.
This candlestick pattern provides a good bullish signal, but remember that not all stars are as bright as any stars. A Morning Star model, if it has the following characteristics, is more reliable:
- The first bearish candle pushes prices to the previous low, which is into support.
- The first day candle has small volume, the third day candle has large volume, increasing the possibility of a reversal.
- The middle candle must have a very short body, such as the Doji candle or the long tail Doji candle, showing the market's hesitation and hesitation. Besides, if this candle has a gap (gap) compared to the other 2 candles, the better.
- The third day's bullish candlestick closes the minimum and is higher than ½ to ¾ the length of the first day's candle. This helps to generate stronger signals.
Psychological evolution of the Morning Star model
The pattern begins with a long bearish candlestick indicating that sellers are in control of the situation and continue to push prices lower on the upside. However, after that the market started to hesitate, some insiders took profits, some outsiders started buying, some others were hesitant and did not want to trade. At this time the market is in balance, creating a short body candle, unable to continue the strong downtrend.
Continuing, new buying pressure appeared, many sellers turned to the buying side creating pressure to push the price up to finally close at a high level, indicating that the buyers have risen to dominate the situation. At the same time, many people who entered the sell orders on the first and second candles suffered a considerable loss. When some people have to cut losses, even switch to the buyers, the price will rise and support the market reversal.
Actual example of Morning Star model
Below is an example of Morning Star on the daily chart of the EURUSD currency pair. In this pattern, the second candle is a tree Inverted Hammer, also a reversal candle. The third day's bullish candle is also quite long but can not exceed ½ of the first candle. The price then increased in the next 3 trading days before continuing the downtrend.
Instruction for trading with Morning Star model
The probability of success with Morning Star will increase if we are trading in the support or oversold area. What do we do if we see the bullish candlestick close and finish creating the Morning Star?
For many cautious traders, they often do not enter orders when the Morning Star pattern has just been created, but wait for a few more candles to assess the situation. However, the market just moved very fast to create a strong bullish candle. If you hesitate, you will probably have to enter the order at a more unfavorable point. Therefore, you can consider the order as soon as the model is complete, especially when there are additional support factors such as support, oversold areas.
Below is an illustrative example of how to enter an order on the EURUSD chart. Buy orders are made immediately after the 3rd candle is created.
The forex market is not in a position to protect traders, so we must protect ourselves by placing a stop loss. Stop loss should be placed below the bottom of the pattern or the nearest bottom.
Take profit is set at the overhead resistance or past price accumulation areas as shown below.
Morning Star is a popular model in the forex market, on many different time frames. This pattern is easy to identify as well as has quite simple command entry rules. However, if the Morning Star reverses to a failure, the price can continue to fall quite deeply so always set a Stop loss and manage risk appropriately. Good luck!
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Author: Tin Nguyen
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