How to Make Money Trading with Candlestick Charts

Morning Star signal variations
Why the Reversal Works
Consider a stock which has been steadily
moving down. Then one day panic grips the
investors in that stock. They no longer want
to hold on to the losing position. This panic

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selling creates a long dark candle. The next
day there is a battle between the bulls and
bears. Smart money is buying and the final
panicky sellers are happy to sell to them.
This creates indecision. The bulls seize this
opportunity to get control of the stock. The
short sellers start covering their position
leading to further upward movement. The
signal is formed when bulls are able to close
the candle half way up the dark candle
formed two days back. Probabilities support
trend reversal at this point.
The Morning Star signal is a very visual
signal, where you can actually see the change
in investor perception towards the stock. In
Figure 9.2
, you can witness the various days
of indecision. If the middle day is a one-day

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reversal signal, that adds more weight to the
Morning Star signal.
Notice the Abandoned Baby Morning Star
signal shown in the same figure. This is a
very powerful reversal signal. Analyze the
formation. There is a gap between the low of
the first day and the high of the second day.
There is also a gap between the high of the
second day and the low of the third day.
What is going on in that formation in terms of
fear and greed? The first gap shows panic
selling in the stock. Then the bulls and the
bears get locked into a fight. The third day
shows the outcome of the fight. The second
gap represents the strength of the victory.
You as a candlestick trader have to be in this
stock at this point!

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The following circumstances will further
enhance the probability of reversal shown by
the Morning Star signal:
The first day’s dark candle body is very
long compared to the rest of the trading
range. By definition of the signal, this
would necessitate that the bullish candle
on the third day be large as well.
There is a spike in volume on the
indecision day.
Stochastics are in an oversold condition.
The second day forms one of the one-day
candlestick reversal signals.
Figure 9.3
 shows the chart of Bharat Heavy
Electricals Limited.

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Figure 9.3: