Usage of candle formations: Morning and Evening Star

 

This strategy uses Morning Star and Evening Star candle patterns as signals to open positions.
Morning Star is a bullish reversal pattern consisting of three candles, which usually occurs after a strong downtrend. It gives a buy signal and also indicates a potential support level.

Morning Star logic

This pattern uses 3 candles:
Candle #1: Current Candle (1-st candle from the right),
Candle #2: Previous Candle (2-nd candle from the right),
Candle #3: Before Candle (3-rd candle from the right).

CURRENT candle requirements:
1) Current must be a bull candle: Current Close > Current Open;
2) Current must be a decision candle: (Current Close - Current Open) >= 0.7*(Current High - Current Low).

PREVIOUS candle requirements:
1) Previous must be an indecision candle: |Previous Close - Previous Open| < 0.7*(Previous High - Previous Low);
2) Previous body must always be a fraction of Current body: |Previous Open - Previous Close| <= 0.2*(Current Close - Current Open). 

BEFORE candle requirements:
1) Before must be a bear candle: Before Close < Before Open;
2) Before must be a decision candle: (Before Open - Before Close) >= 0.7*(Before High - Before Low)

Condition to Signal a Morning Star:
All the above is true and
|Current Close - min(Previous Close, Previous Open)| >= 0.8*|Before Open - min (Before Close, Previous Open, Previous Close)|.


Evening Star is a bearish reversal pattern consisting of three candles, which usually occurs after an uptrend. It gives a sell signal and also indicates a potential resistance level.

Candle #1: Current Candle (1-st candle from the right),
Candle #2: Previous Candle (2-nd candle from the right),
Candle #3: Before Candle (3-rd candle from the right).

CURRENT candle requirements:
1) Current must be a bear candle: Current Close < Current Open;
2) Current must be a decision candle: (Current Open - Current Close) >= 0,7*(Current High - Current Low).

PREVIOUS candle requirements:
1) Previous must be an indecision candle: |Previous Close - Previous Open| < 0.7*(Previous High - Previous Low);
2) Previous body must always be a fraction of Current body: |Previous Open - Previous Close| <= 0.2*(Current Open - Current Close). 

BEFORE candle requirements:
1) Before must be a bull candle: Before Close > Before Open;
2) Before must be a decision candle: (Before Close - Before Open) >= 0.7*(Before High - Before Low)

Condition to Signal an Evening Star:
All the above is true and
|Current Close - max(Previous Close, Previous Open)| >= 0.8*|Before Open - max (Before Close, Previous Open, Previous Close)|.

Note: The default values of the Morning and Evening Star parameters are as follows:
Decision candle body coefficient = 0.7.
Number of times the previous candle should be smaller than the current = 0.2.
Number of times the pre-previous candle should be smaller than the current = 0.8.
These values can be changed in the Strategy Settings.