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What is the Tri-Star Pattern?

The Tri-Star Top and Tri-Star Bottom Patterns

The Tri-Star candlestick pattern is a very rare but a very significant trend reversal pattern that can mark not only the probable end of that trend but also the highly probable start of a new trend in the opposite direction. It is a triple candlestick pattern that is similar to the Morning Star and Evening Star patterns with the exception being that the three candlesticks that form the pattern are all Doji. The Tri-Star pattern can be bullish, making it a Tri-Star Bottom, or bearish, making it a Tri-Star Top, depending on the nature of the trend that it appears in.

The Tri-Star Formation

The Tri-Star pattern consists of three consecutive candlesticks that are all Doji, with the middle candlestick said to be a Doji Star, though it does not follow after a long candlestick. A Doji is a relatively short candlestick with no real body, or very little real body as well as relatively short shadows. It indicates that the opening and closing prices for the period were at the exact same level or very close and the relatively short shadows indicate that the price has not moved significantly in either direction. In the Tri-Star pattern, the Doji need not be prefect but there must be three of them and the middle Doji must gap away from the two Doji lines on either side of it.

The Tri-Star Top

The Tri-Star Top is the bearish version of the Tri-Star pattern that can appear in a well-established uptrend or after an extended rally. The first candlestick in the pattern must be a Doji that is followed by two more Doji. The second Doji must gap up on open above the first Doji. The third Doji then gaps down on open to open below the second Doji. The result is three Doji with the second Doji gaping away from the other two.

What the Tri-Star Top tells us

The Tri-Star Top is a bearish trend reversal pattern that appears in an uptrend. Here the bulls have been in control of the market for a while. The appearance of the first Doji indicates that there is indecision and uncertainty in the market with neither buyers nor sellers able, or willing, to move the price to significant levels, which would indicate a weakness in the current trend and already wans of a possible trend reversal. The appearance of the second Doji further confirms that the uptrend is losing momentum, especially as the second Doji bullishly gaps up in the direction of the prevailing trend but fails to move the market in either direction. The appearance of a third Doji shows extreme weakness in the uptrend as it forms lower than the second Doji, and against the current uptrend. It indicates that the current trend is exhausted. As a result, the bulls could be expected to close their long position, making a trend reversal probable.

Trading the Tri-Star Top

Once the Tri-Star Top has formed the trader would anticipate a bearish trend reversal. Traders that are holding long positions would be looking to exit their positions and would look to enter a short position. Exiting an existing long position can be performed immediately on the open of the candlestick that follows the Tri-Star Top as holding a long position in a market that is indecisive would be risky. To open a short position, an aggressive trader could place a short sell order at the low of the last Doji in the pattern in anticipation of the bearish downtrend that is highly probable. A more conservative trader would wait for confirmation of the reversal before placing a sell order. This confirmation would be in the form of a close below the low of the first candlestick in the Tri-Star Top. However, as there is still a slight possibility that the pattern might fail, the trader should place a protective stop at the high of the pattern, which is the high of the second Doji. Should the price retrace, it should not break above the Tri-Star Top pattern as this would nullify the pattern. The stop-loss should not be too far from the entry, given the small size of the Doji that constitute the pattern.

The Tri-Star Top does not provide a clear profit target but previous levels of support or previous area of consolidation could be used as an initial price target. A trader could also implement a profit target based on a defined risk/reward ratio, a measured move, or some other trading mechanism can be used to exit the trade. This could be a Fibonacci retracement level, the appearance of a bullish candlestick formation, or a simple trailing stop.

The reliability of the Tri-Star Top is enhanced if the third candlestick opens below the real body of the Star leaving a gap between the real bodies of the Star and the third candlestick, similar to an abandoned baby. This, however, occurs very rarely. Reliability is also enhanced by the extent to which the real body of the third candlestick penetrates the real body of the first candlestick, and if the third candlestick has very little or no lower shadow. Finally, volume should also be considered as the pattern is more reliable if the volume on the first candlestick is lower and the volume on the third candlestick is higher.

The Tri-Star Top does not provide a profit target but previous levels of support or previous areas of consolidation could be used as an initial price target. Fibonacci retracement levels, or the appearance of a bullish candlestick formation, or a trailing stop can also be used to exit the trade and take profit.

The Tri-Star Top also becomes more reliable when the gaps between the three Doji are larger. As with most trend reversal patterns, the bearish Tri-Star Top also becomes more reliable depending on where it appears on the price chart in relation to trend lines, pivot points, and support and resistance lines, etc. Furthermore, traders can use the Tri-Star Top in conjunction with an oscillating indicator, such as the RSI, that shows the security to be overbought.

The Tri-Star Bottom

The Tri-Star Bottom is the opposite of the Tri-Star Top. It is a bullish trend reversal pattern that appears in an established downtrend. The first candlestick in the Tri-Star Bottom pattern must be a Doji that must be followed by two more Doji. The second Doji must gap down on open to open below the first Doji and the third Doji must gap up on open to open above the second Doji. As with the Tri-Star Top, the resultant formation is three Doji with the gaping away from the other two Doji on either side of it.

What the Tri-Star Bottom tells us

The Tri-Star Bottom warns that a bullish reversal of the current downtrend is imminently probable. As with the Tri-Star Top, the appearance of first Doji is the first indication of indecision and uncertainty in the market. It is the first warning of weakness in the current downtrend. The appearance of the second Doji further confirms that the downtrend is running out of steam, especially as the second Doji gaps down in the direction of the prevailing trend but then the price fails to move significantly in either direction. Finally, the appearance of a third Doji indicates extreme weakness in the downtrend as it forms above the second Doji, and against the current downtrend. This indicates that the downtrend is exhausted, making a reversal extremely probable as the bearish traders would have reason to be concerned and would be looking to exit their short positions.

Trading the Tri-Star Bottom

Trading the Tri-Star Bottom is the inverse of trading the Tri-Star Top. Once the Tri-Star Bottom has formed, traders holding short positions would be looking to cover their positions. This can be performed immediately on the open of the candlestick that follows the Tri-Star Bottom. Traders would also be anticipating a bullish trend reversal and would be looking to go long (buy). An aggressive trader could place a long buy order at the high of the last Doji in the pattern in anticipation of the bullish reversal, while a more conservative trader would wait for confirmation of the reversal before placing a buy order. This confirmation would be in the form of a close above the high of the first candlestick in the Tri-Star Bottom pattern. As the long position would be taken against the current trend, there is still a possibility that the pattern could fail; therefore, the trader should place a protective stop-loss just below the low of the second Doji in the Tri-Star Bottom. Should the price retrace, it should not break below this level as this would nullify the Tri-Star Bottom.

As with the Tri-Star Top, the Tri-Star Bottom does not provide a profit target but previous levels of support or previous areas of consolidation could be used as an initial price target. Fibonacci retracement levels, or the appearance of a bearish candlestick formation, or a trailing stop can also be used to exit the trade and take profit.

As with the Tri-Star Top, the Tri-Star Bottom becomes more reliable when the gaps between the three Doji are larger, and when the pattern forms close to a trend line, a pivot point, or a support and resistance line, etc. Furthermore, traders can use the Tri-Star Bottom in conjunction with an oscillating indicator, such as the RSI, that shows the security to be oversold.