The Evening Star strategy is a simple yet a very powerful Forex reversal strategy. The Evening Star strategy can be broken down into six easy steps. We also have an unorthodox way of reading the price action pattern and from here comes our edge.

The Evening Star chart pattern is a common pattern and not just in the Forex currency market as this pattern can appear in the stock market, commodity markets or any other markets. The Evening Star chart pattern is really a minimalist chart pattern.

Now, let’s turn our focus back to how to correctly identify and trade the Evening Star chart pattern.

First, let’s define the Evening Star chart pattern.

What is the Evening Star Chart Pattern?

In technical analysis, the Evening Star chart pattern is a three candlestick bearish reversal signal. The first candlestick is a long bullish one followed by a second candlestick which is a small candle representing indecision in the market and the third one is a long bearish candlestick that breaks below the low of the middle candle – or the star candle.

The middle candlestick needs to have a short real body followed by small wicks as well.

Figure 1: Evening Star Candlestick Pattern

The signal gets stronger if the third candlestick is a bearish engulfing candle meaning that it closes below the first candlestick open price.

From a psychological point of view, the Evening Star chart pattern is signaling that the bullish momentum is slowing down. This can be an early indication that the smart money are starting to sell, but only a break of the low can confirm the Evening Star chart pattern.

This is a bearish reversal signal so we would only look for this pattern to appear at the end of a bullish trend.

Now… 

Before we move forward, we must define the indicators you need for the Evening Star chart Pattern

The only indicator you need is the:

RSI Indicator is a momentum oscillator indicator that calculates the speed and change of price movements. The RSI is ideal for spotting overbought/oversold conditions in the market.

Trading the Evening Star chart pattern in combination with the RSI indicator is the ultimate symbiosis for spotting turning points in the market. The RSI indicator should be easily located on most trading platforms under the Indicators library.

Figure 2: RSI Indicator

Please allow me to quickly tell you how to use the RSI indicator and how to interpret the information given by this amazing indicator so you can know what you’re trading. When the RSI line is touching the 70 level, we’re in the overbought territory; conversely, when the RSI line is touching the 30 level, we’re in oversold territory. 

Please have a look at the chart example below to see how to use the RSI indicator.

Figure 3: How RSI Indicator Works

Now, it’s time to get back our focus to the Evening Star chart pattern strategy and lay down the six steps. Don’t forget to take a piece of paper and a pen and note down the rules. 

Let’s get started…

Step #1: Wait for the Daily RSI to cross above 70

No matter what type of trading strategy you employ it’s always best to trade with an eye on the Daily time frame. By analyzing the market on multiple time frame we increase the odds of success as we have a more accurate reading of the actual price action.

Figure 4: EUR/USD Daily Chart

This brings us to step #2:

Step #2: Downgrade the Time Frame Down to the 5-Minute Chart and Wait Until the Evening Star chart pattern appears on the chart

We lower our time frame down to the 5-minute chart. We want now to utilize the lower TF to better time our entry. The 5-minute chart is ideal for scalping the market as it’s not too fast and at the same time not too slow.

We also want to see the Evening Star chart pattern developing on the 5-Minute time frame. It is sufficient to wait just for the first two candles of the Evening Star pattern.

Remember, we need the first candle to be a big bullish candle followed by a second candle with a small body. In the figure below you can see the inception of the Evening Star pattern:

Figure 5: EUR/USD 5-Minute Chart

Before looking for the completion of the Evening Star pattern, we also want to make sure the bullish trend is exhausted.

Which brings us to the next step.

Step #3: Check if the RSI Indicator is Above the 70 level

We want to make sure that the Evening Star chart pattern is confirmed again by the RSI indicator. This is a crucial part of the Evening Star chart pattern strategy that we don’t want to neglect. The Evening Star pattern appears in the market quite often so we don’t want to randomly trade every instance when it appears because that’s a recipe for disaster.

As we mentioned before the Evening Star works best when used with the RSI indicator.

Figure 6: EUR/USD 5-Minute Chart – RSI Indicator

So far, so good, but still we haven’t answered the most important question that a trader has: 

When to enter?

Step #4: Entry SHORT once the Star Candle Low is Broken to the Downside

From a psychological point of view, the Evening Star chart pattern is signaling that the bullish momentum is slowing down. This can be an early indication that the smart money are starting to sell, but only a break of the low can confirm the Evening Star chart pattern.

Figure 7: Evening Star Pattern – Sell Entry

At this point, our short position was triggered, but we need a place to hide our protective stop loss and a level where we can take our profits, which brings us the next step of our Evening Star chart pattern strategy.

Step #5: Place Protective Stop Loss 5 pips Above the High of the Star Candle

We want to hide our protective stop loss just above the highest level of the middle candle. In order to avoid getting whipsawed on a false breakout, we want to add a 5 pips buffer to our SL as extra protection not to get stopped out too early.

See figure below:

Figure 8: Evening Star Pattern – Place Stop Loss

Knowing when to take profit is as important as knowing where to place your SL, which brings us to the next step:

Step #6: Take Profit Once the RSI Breaks Below the 30 level

The Evening Star chart pattern strategy looks to capture as much as possible from the new trend and the logical point to take profits should be once the RSI indicator reaches the oversold territory. We want to take profits as soon as the RSI oscillator breaks below the 30 level.

See figure below:

Figure 9: Evening Star Pattern – Take Profit

Note** The above was an example of a SELL trade using the Evening Star chart pattern. Use the exact same rules for the Morning Star chart pattern which is opposite to the Evening Star for a BUY trade. In the figure below you can see an actual BUY trade example, using the Evening Star chart pattern strategy.

Take a look:

We’ve applied the same Step #1 to help us identify the directional bias followed Step #2 through Step #6 to trigger our BUY trade (see next figure).

Conclusion

The Evening Star chart pattern strategy is a great reversal strategy that proves that you can still find successful Forex trading strategies. All that matters is to know how to correctly look at the price action and more important to exercise discipline and only trade when all factors come together and signal a trade.

Thank you for reading!