The Candlestick Star Breakout Strategy Guide

Today I wanted to share a guide on how to successfully trade Star Breakouts.

Star Breakouts are basically just price action candlestick reversal patterns that form the shape of a star using the current trend of the market.

By the end of this article it is my goal that you will be able to successfully start trading each one of the reversal patterns for profit.

But before we dive into the strategies themselves I first want to do some review on trends as we will be needing them for our strategies.

What is a trend?

A trend is the general direction in which the price of a security is developing or moving is known as a trend. The security could be anything – equities, bonds, indices, currency, commodities, derivatives, etc.

How to identify a trend?

Support Trendline

The lows made by the price of a security, during a time interval, are connected to check if the lows form a straight line. If a straight line is generated, a support trendline is formed. Support in the sense that the price doesn’t slip below this line.

Support Trendline

Resistance Trendline

The highs made by the price of a security, during a time interval, are connected to check if the highs form a straight line. If a straight line is generated, a resistance trendline is formed. Resistance in the sense that the price doesn’t break above this line.

Resistance Trendline

Base on the formation of the support and resistance trend lines trends can be classified into three types:

1- Uptrend

When a security makes higher highs and higher lows, the security is in an uptrend; as shown in the picture below:

uptrend

2- Downtrend

When a security makes lower highs and lower lows, the security is in a downtrend; as shown in the picture below:

downtrend

3- Horizontal trend/Sideways trend

When a security makes same highs and same lows, the security is in a horizontal trend; as shown in the picture below. Experienced traders use the term sideways movement for horizontal trend.

horizontal trend

If a security trades in a trend, it is easy to make money trading the security. However, things become nasty when the trend breaks. Let’s figure out few ways to find out when the trend is going to break.


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Trend Reversal

A change in the direction of the price against the prevailing trend is known as trend reversal.
Trend reversal can also be referred to as a rally or a correction. Rally – when the price breaks a downtrend to go higher. Correction – when the price breaks an uptrend to move lower.

Double Top Trend Reversal

Double top represents a trend reversal pattern in an uptrend; as shown in the picture below. Remember, the two tops formed in the double top should be formed in a short time interval.

Double Top Trend Reversal

How to trade double top?

After spotting the double top, don’t jump just right in to sell. Wait, and, wait until the support trendline is broken. If the support trendline breaks, the double top can be relied upon to sell. This is where a sell position should be initiated, with a stop loss above the support level price.

Double Top Trend Reversal

Double Bottom Trend Reversal

Double bottom represents a trend reversal pattern in a downtrend; as shown in the picture below. Remember, the two bottoms formed in the double bottom should be formed in a short time interval.

Double Bottom Trend Reversal

How to trade double bottom?

After spotting the double bottom, wait until the resistance trendline is broken; and the security has traded above the resistance trendline for some time. If the resistance trendline breaks, the double bottom can be relied upon to buy. This is where a buy position should be initiated, with a stop loss below the support level price.

Morning Star

What is the morning star breakout pattern?

A morning star is a strong reversal pattern in a downtrend; as shown in the figure below. It consists of three candlesticks:

1- A long black candlestick.
This confirms that the downtrend is in place.

2- A small white or black candlestick that is below the previous candlestick.
This indicates more selling pressure. Since the size of this candlestick is small, it indicates indecision, and a possible reversal of trend.

3- A long white candlestick
This signals a reversal of the downtrend.

Morning Star Pattern

When to trade the morning star pattern?

Upon discovering the morning star, wait for some time to confirm that the price is indeed moving up. If the price doesn’t fall below the candle formed in step 3 above, initiate a buy position to gain from an up move. The probability of success for this strategy is 80%.

Evening Star

The evening star is a strong reversal pattern in an uptrend; as shown in the figure below. It consists of three candlesticks:

1- A long white candlestick.
This confirms that the uptrend is in place.

2- A small white or black candlestick that is above the previous candlestick.
This indicates more buying power. Since the size of this candlestick is small, it indicates indecision, and a possible reversal of trend.

3- A long black candlestick
This signals a reversal of the uptrend.

When to trade the evening star pattern?

Upon discovering the evening star, wait for some time to confirm that the price is indeed coming down. If the price doesn’t move above the candle formed in step 3, initiate a sell position to gain from a down move. The probability of success for this strategy is 80%.

Points to Remember:

• Be careful while choosing the highs and the lows to draw the support and the resistance trend lines. Trading is not an exact science. Slight deviations can be ignored.

• Candles of any colour can be used to draw the candlestick chart. However, remember to follow the logic presented.

• Always use stop loss.

-J

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