Summary of Morning Star Pattern

MORNING STAR PATTERN SUMMARY

After examining thousands of morning star patterns in different market conditions and using various filters, the test results presented above indicate that trading the morning star pattern may be improved if traders consider trading patterns where the first day’s body size is less than 30% of the first days trading range. Trading results may also be improved by trading patterns where the first day’s black body is larger than the previous day’s body, or requiring the second day’s body to be less than 60% of the second day’s range, or requiring the close of the second day of the pattern to be below the low of the first day of the pattern. Test results are also improved when the second day of the pattern has a black, rather than white, body; and when using a 4 to 5 day holding period.

The testing also indicates that results are not improved, or may be diminished, when using morning star patterns that have a body on the second day of the pattern that is smaller than the body on the first day of the pattern, or when the third day of the pattern starts with a gap up, or when using a holding period less than four days or more than five days.

A large range on the third day of the pattern does not seem to help results nor is there a strong correlation between test results and how far into the upper half of the first day’s range the close on the third day of the pattern is. It is just important that the third day of the pattern closes at a price level somewhere in the upper half of the first day’s range.

Requiring that the close on day two is lower than the close on day one of the pattern does not significantly improve testing results. Note that requiring the close on day two of the pattern to be lower than the low of day one improves results, but just requiring the low of day two to be lower than the close of day one does not significantly improve results.

The improved morning star pattern requirements are:

• The stock must be in a downtrend.
• The first day of the pattern must be:
• A black bar.
• Have a body larger than the previous day’s body.

The second day of the pattern must:

• Open below the close of the first day.
• Have a body less than 60% of the day’s range.
• Be a black body.

The third day of the pattern must:

• Be a white body.
• Must close above the middle of the first day’s range.