A Tri-Star Top

Candlestick patterns create models which are a visual representation of market sentiment as well as a forward forecasting tool. This technical approach looks at past market moves in an attempt to identify patterns that occur with regularity that can be found during various market scenarios.

Continuation Patterns

In one of the pattern types identified, there are two basic classes. The first class of patterns indicate that the current direction and trend of the market is likely to stay the course, and therefore is labeled as continuation patterns.

An example of this pattern type is the three-white soldiers pattern. This pattern is composed of three bullish individual candlesticks. A daily bullish candlestick is created when there is a significant price gain between where the market opened and where the market closed.

The three-white soldiers pattern is composed of three bullish candlesticks in which the second and third candlestick open within the range created from the real body of the prior day, and close above the prior days close. It is believed that this pattern indicates that there will be a continuation of the bullish trend already in place.

Reversal Patterns

The majority of candlestick patterns are those that indicate a key reversal or pivot point, and as such are labeled as reversal patterns. Examples of bullish reversal patterns include the piercing line and the engulfing bullish. The criteria for these patterns necessitate that the formations occur after a defined downtrend in the market. In both the piercing line and engulfing bullish patterns which follow a sizeable down day, price action will open below the prior day to close at or above the midpoint to create a piercing line. It may also completely engulf the prior candle and close above the opening price of the prior day. Both of these patterns are relatively common and have a high probability of occurrence during key reversal.

One of the rarest reversal patterns indicating a shift in market sentiment is the Tri-Star top and Tri-Star bottom.

A Tri-Star is a rare candlestick pattern comprised of three Doji candles. The Tri-Star formation occurs at market tops and bottoms. The three Doji candles represent indecision on the part of traders, which leads to reversals. This pattern is usually accompanied by light volume. This pattern requires follow-through action, so it is best to wait for confirmation.

Identifying A Tri-Star Top

After defined uptrend in the market, there are three days in which Doji candles are formed. A Doji occurs on a trading day in which the open and closing prices are identical or a few ticks apart. After the first Doji is formed, the second day will also create a Doji candle which will be higher than the candle it preceded. The last of these three Doshi candles will be below the middle candle and at the same price point as the first candle.

According to Investopedia, “A single Doji candlestick is an infrequent occurrence that is used by traders to suggest market indecision. Having a series of three consecutive doji candles is extremely rare, but when it is discovered, the severe market indecision generally leads to a sharp reversal of the given trend. The "three stars" pattern can also be used to signal the reversal of downward momentum when the pattern is formed at the end of a prolonged downtrend.”

This pattern type is straightforward to identify but extremely rare in terms of occurrence. However, once this pattern is identified, one can expect a sharp reversal as the current trend comes to a conclusion.

Wishing you as always, good trading,