The Tri-Star Candlestick Pattern
The tri-star candlestick pattern is a very rare trend reversal pattern, but a very significant reversal signal. The tri-star pattern consists of three consecutive candlesticks that are all dojis, with the middle candlestick being a doji star. 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 dojis need not be prefect but there must be three of them and the middle doji must be a star that gaps away from the previous doji line in the direction of the prevailing trend.
As the tri-star candlestick pattern is a trend reversal pattern, it must occur in an established trend, where it marks not only the probable end of that trend but also the highly probable start of a new trend in the opposite direction. The tri-star pattern can be a bullish tri-star bottom if it appears at the end of a downtrend, or a bearish tri-star top if it appears at the end of an established uptrend.
The tri-star top is a bearish reversal pattern that appears in an uptrend. It warns that a bearish reversal of the current uptrend is highly probable. 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 forms a star that 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 market sentiment is changing, making a reversal even more probable.
Once the tri-star top has formed the trader would anticipate a bearish trend reversal. The 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. 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 tri-star bottom is the opposite of the tri-star top. It is a bullish reversal pattern that appears in an established downtrend. It 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 forms a star that 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 market sentiment is turning, making a reversal extremely probable.
Trading the tri-star bottom is the inverse of trading the tri-star top. Once the tri-star bottom formed, the trader would anticipate a bullish trend reversal and could place a long buy order at the high of the last doji in the pattern in anticipation of a bullish trend reversal. Here the protective stop order should be placed at the low of the pattern, which is also the low of the second doji. Should the price break below the tri-star bottom pattern, the pattern would be nullified and the trader should exit his or her position.