Evening Star Pattern Summary

EVENING  STAR PATTERN SUMMARY

After all of our backtesting, the test results presented here indicate that the results of trading the evening star pattern may be improved by requiring that the third day of the pattern has a body length that is the largest body length in the last five days. Trading results can also be improved by: using patterns that show white space gaps on the third day; trading patterns where the second day has a white, not a black, body; using patterns whose first day’s body is the largest body in the last three trading days; and looking for patterns whose recent average volume is declining.

The testing also indicates that results are not improved, or may be diminished, when using the evening star pattern in the following conditions: when the third day of the three day pattern opens with a gap down; using patterns that show white space gaps on the second day of the pattern; using patterns that occur at a recent high; and picking patterns that show rapid runs with a price movement of at least twenty percent in ten days.

• The improved evening star pattern requirements are:
• The stock must be in an uptrend.
• The simple average of the volume during the five days before the evening star must be less than the average volume of the past 25 days.

Day one requires:

1. A white body.
2. A body larger than the previous day’s body.

Day two requires:

1. Either color body.
2. A body less than 30% of the previous day’s body.
3. A gap up, defined as the opening being above the previous day’s close.

Day three requires:

1. A black body.
2. A close below the midpoint of the range of day one.

Remember, backtesting does not guarantee any future result. It is unlikely to find a realistic pattern that works all the time. Trading is a statistical business where traders must understand how often their pattern may be expected to win and lose, and they must adjust their strategies accordingly. Trading will always present risks, and good traders must learn how to manage those risks through careful analysis of the market conditions and adjustments to exit strategies, number of trading positions, and position sizes.