Evening Star Definition
What Is an Evening Star?
An evening star is a stock-price chart pattern used by technical analysts to detect when a trend is about to reverse. It is a bearish candlestick pattern consisting of three candles: a large white candlestick, a small-bodied candle, and a red candle.
Evening star patterns are associated with the top of a price uptrend, signifying that the uptrend is nearing its end. The opposite of the evening star is the morning star pattern, which is viewed as a bullish indicator.
Key Takeaways An evening star is a candlestick pattern used by technical analysts to predict future price reversals to the downside.
Although it is rare, the evening star pattern is considered by traders to be a reliable technical indicator.
The evening star is the opposite of the morning star pattern. The two are bearish and bullish indicators, respectively.
How an Evening Star Works
A candlestick pattern is a way of condensely presenting certain information about a stock. Specifically, it represents the open, high, low, and close price for the stock over a given time period.
Each candlestick consists of a candle and two wicks. The length of the candle is a function of the range between the highest and lowest price during that trading day. A long candle indicates a large change in price, while a short candle indicates a small change in price. In other words, long candlestick bodies are indicative of intense buying or selling pressure, depending on the direction of the trend, while short candlesticks are indicative of little price movement.
The evening star pattern is considered a very strong indicator of future price declines. Its pattern forms over a period of three days:
The first day consists of a large white candle signifying a continued rise in prices. The second day consists of a smaller candle that shows a more modest increase in price. The third day shows a large red candle that opens at a price below the previous day and then closes near the middle of the first day.
Special Considerations
The evening star pattern is considered a reliable indicator that a downward trend has begun. However, it can be difficult to discern amidst the noise of stock-price data. To help identify it reliably, traders often use price oscillators and trendlines to confirm whether an evening star pattern has in fact occurred.
It’s advisable to consult various different technical indicators to predict price movements, as opposed to relying solely on the signals provided by one.
Despite its popularity among traders, the evening star pattern is not the only bearish indicator. Other bearish candlestick patterns include the bearish harami, the dark cloud cover, the shooting star, and the bearish engulfing. Different traders will have their own preferences regarding what patterns to watch for when seeking to detect trend changes.
Example of an Evening Star Pattern
The following chart provides an example of the evening star pattern:
Image by Sabrina Jiang © Investopedia 2021
As you can see, the three days depicted begin with a long white candle that indicates prices have risen from significant buying pressure. The second day also shows a rise in prices, but the extent of the increase is modest compared to the previous day. Lastly, the third day shows a long red candle in which selling pressure has forced the price to around the midpoint of the first day.
These are the tell-tale signs that an evening star pattern has occurred. Technical analysts trading this security would consider selling or shorting the security in anticipation of an upcoming decline.
Understanding the ‘Hanging Man’ Candlestick Pattern
The hanging man is a type of candlestick pattern. Candlesticks displays the high, low, opening and closing prices for a security for a specific time frame. Candlesticks reflect the impact of investor' emotions on security prices and are used by some technical traders to determine when to enter and exit trades.
The term “hanging man” refers to the candle’s shape, as well as what the appearance of this pattern infers. The hanging man represents a potential reversal in an uptrend. While selling an asset solely based on a hanging man pattern is a risky proposition, many believe it’s a key piece of evidence that market sentiment is beginning to turn. The strength in the uptrend is no longer there.
1:42 Understanding Basic Candlestick Charts
The Hanging Man Explained
The hanging man occurs when two main criteria are present:
The asset has been in an uptrend.
The candle has a small real body (distance between open and close) and a long lower shadow. There is little to no upper shadow.
Given these two criteria, when a hanging man forms in an uptrend, it indicates that buyers have lost their strength. While demand has been pushing the stock price higher, on this day, there was significant selling. While buyers managed to bring the price back to near the open, the initial sell-off is an indication that a growing number of investors think the price has peaked. For believers in candlestick trading, the pattern provides an opportunity to sell existing long positions or even go short in anticipation of a price decline.
The hanging man is characterized by a small “body” on top of a long lower shadow. The shadow underneath should be at least twice the length of the body.
Image by Julie Bang © Investopedia 2019
The chart below shows two hanging man patterns in Facebook, Inc. (FB) stock, both which led to at least short-term moves lower in the price. The long-term direction of the asset was unaffected, as hanging man patterns are only useful for gauging short-term momentum and price changes.
Even though traders often count on candlestick formations to detect the movement of individual stocks, it is also appropriate to look for candlestick patterns in indexes, such as the S&P 500 or Dow Jones Industrial Average. Candlesticks can be also be used to monitor momentum and price action in other asset classes, including currencies or futures.
Distinguishing Features
If it’s an actual hanging man pattern, the lower shadow is at least two times as long as the body. In other words, traders want to see that long lower shadow to verify that sellers stepped in aggressively at some point during the formation of that candle.
Thomas Bulkowski’s “Encyclopedia of Candlestick Charts” suggests that, the longer the lower shadow, the more meaningful the pattern becomes. Using historical market data, he studied some 20,000 hanging man shapes. In most cases, those with elongated shadows outperformed those with shorter ones. Some traders will also look for strong trading volume. Bulkowski’s research supports this view. Of the many candlesticks he analyzed, those with heavier trading volume were better predictors of the price moving lower than those with lower volume.
Another distinguishing feature is the presence of a confirmation candle the day after a hanging man appears. Since the hanging man hints at a price drop, the signal should be confirmed by a price drop the next day. That may come by way of a gap lower or the price simply moving down the next day (lower close than the hanging man close). According to Bulkowski, such occurrences foreshadow a further pricing reversal up to 70% of the time.
It’s worth noting that the color of the hanging man’s real body isn’t of concern. All that matters is that the real body is relatively small compared with the lower shadow.
Trading the Hanging Man
The hanging man patterns that have above average volume, long lower shadows and are followed by a selling day have the best chance of resulting in the price moving lower. Therefore, it follows that these are ideal patterns to trade off of.
Upon seeing such a pattern, consider initiating a short trade near the close of the down day following the hanging man. A more aggressive strategy is to take a trade near the closing price of the hanging man or near the open of the next candle. Place a stop-loss order above the high of the hanging man candle. The following chart shows the possible entries, as well as the stop-loss location.
One of the problems with candlesticks is that they don’t provide price targets. Therefore, stay in the trade while the downward momentum remains intact, but get out when the price starts to rise again. Hanging man patterns are only short-term reversal signals.
A Question of Reliability
If looking for any hanging man, the pattern is only a mild predictor of a reversal. Look for specific characteristics, and it becomes a much better predictor. Bulkowski is among those who feel the hanging man formation is, in and of itself, undependable. According to his analysis, the upward price trend actually continues a slight majority of the time when the hanging man appears on a chart.
However, there are things to look for that increase the chances of the price falling after a hanging man. These include above average volume, longer lower shadows and selling on the following day. By looking for hanging man candlestick patterns with all these characteristics, it becomes a better predictor of the price moving lower. Stick to trading only these strong types of patterns.
Hanging Man vs. Shooting Stars and Hammers
There are two other similar candlestick patterns. This can lead to some confusion.
The hanging man appears near the top of an uptrend, and so do shooting stars. The difference is that the small real body of a hanging man is near the top of the entire candlestick, and it has a long lower shadow. A shooting star as a small real body near the bottom of the candlestick, with a long upper shadow. Basically, a shooting star is a hanging man flipped upside down. In both cases, the shadows should be at least two times the height of the real body. Both indicate a potential slide lower in price.
The hanging man and the hammer are both candlestick patterns that indicate trend reversal. The only difference between the two is the nature of the trend in which they appear. If the pattern appears in a chart with an upward trend indicating a bearish reversal, it is called the hanging man. If it appears in a downward trend indicating a bullish reversal, it is a hammer. Apart from this key difference, the patterns and their components are identical.
The Bottom Line
Hanging men occur frequently. If you highlight them all on a chart, you will find that most are poor predictors of a price move lower. Look for increased volume, a sell-off the next day, and longer lower shadows, and the pattern becomes more reliable. Utilize a stop loss above the hanging man high if you are going to trade it.
Three Black Crows Definition
What Are the Three Black Crows?
Three black crows is a phrase used to describe a bearish candlestick pattern that may predict the reversal of an uptrend. Candlestick charts show the day’s opening, high, low, and closing prices for a particular security. For stocks moving higher, the candlestick is white or green. When moving lower, they are black or red.
The black crow pattern consists of three consecutive long-bodied candlesticks that have opened within the real body of the previous candle and closed lower than the previous candle. Often, traders use this indicator in conjunction with other technical indicators or chart patterns as confirmation of a reversal.
Key Takeaways Three black crows is a bearish candlestick pattern used to predict the reversal of a current uptrend.
Traders use it alongside other technical indicators such as the relative strength index (RSI).
The size of the three black crows candles and the shadow can be used to judge whether the reversal is at risk of a retracement.
The opposite pattern of three black crows is three white soldiers, which indicates a reversal of a downtrend.
Three Black Crows Explained
Three black crows are a visual pattern, meaning that there are no particular calculations to worry about when identifying this indicator. The three black crows pattern occurs when bears overtake the bulls during three consecutive trading sessions. The pattern shows on the pricing charts as three bearish long-bodied candlesticks with short or no shadows or wicks.
In a typical appearance of three black crows, the bulls will start the session with the price opening modestly higher than the previous close, but the price is pushed lower throughout the session. In the end, the price will close near the session low under pressure from the bears.
This trading action will result in a very short or nonexistent shadow. Traders often interpret this downward pressure sustained over three sessions to be the start of a bearish downtrend.
Image by Julie Bang © Investopedia 2020
Example of How to Use Three Black Crows
As a visual pattern, it’s best to use three black crows as a sign to seek confirmation from other technical indicators. The three black crows pattern and the confidence a trader can put into it depends a lot on how well-formed the pattern appears.
The three black crows should ideally be relatively long-bodied bearish candlesticks that close at or near the low price for the period. In other words, the candlesticks should have long, real bodies and short, or nonexistent, shadows. If the shadows are stretching out, then it may simply indicate a minor shift in momentum between the bulls and bears before the uptrend reasserts itself.
Volume can make the three black crows pattern more accurate. Volume during the uptrend leading up to the pattern is relatively low, while the three-day black crow pattern comes with relatively high volume during the sessions. In this scenario, the uptrend was established by a small group of bulls and then reversed by a larger group of bears.
Of course, with markets being what they are that could also mean a large number of small bullish traders running into a smaller group of large volume bearish trades. The actual number of market participants matters less than the volume each is bringing to the table.
Three Black Crows vs. Three White Soldiers
The opposite of the three black crows pattern is the three white soldiers pattern, which occurs at the end of a bearish downtrend and predicts a potential reversal higher. This pattern appears as three long-bodied white candlesticks with short, or ideally nonexistent, shadows. The open occurs within the previous candlestick’s real body, and the close occurs above the previous candlestick’s close.
Three white soldiers are simply a visual pattern indicating the reversal of a downtrend whereas three black crows indicate the reversal of an uptrend. The same caveats apply to both patterns regarding volume and confirmation from other indicators.
Limitations of Using Three Black Crows
If the three black crows pattern involves a significant move lower, traders should be wary of oversold conditions that could lead to consolidation before a further move lower. The best way to assess the oversold nature of a stock or other asset is by looking at technical indicators, such as the relative strength index (RSI), where a reading below 30.0 indicates oversold conditions, or the stochastic oscillator indicator that shows the momentum of movement.
Many traders typically look at other chart patterns or technical indicators to confirm a breakdown, rather than using the three black crows pattern exclusively. As a visual pattern, it is open to some interpretation such as what is an appropriately short shadow.
Also, other indicators will mirror a true three black crows pattern. For example, a three black crows pattern may involve a breakdown from key support levels, which could independently predict the beginning of an intermediate-term downtrend. The use of additional patterns and indicators increases the likelihood of a successful trade or exit strategy.
Real-World Example of Three Black Crows
In the third week of May 2018, a three black crows pattern appeared on the GBP/USD weekly price chart, representing an ominous sign for the currency pairing. Analysts speculated that the three black crows pattern indicated that the pairing would continue to trend low. Three factors were analyzed to determine that the three black crows pattern signaled a continuing downturn: