Evening Star Reversal

Entry Logic

• Exact entry trigger: Sell on the open of the candle following the completion of the three-candle Evening Star pattern.
• Confirmation requirements: The first candle is a long bullish candle. The second candle is a small-bodied candle that gaps up. The third candle is a strong bearish candle that closes at least halfway into the body of the first bullish candle. Volume should be highest on the third candle.
• Timeframe required: Daily or 4-hour chart.
• Location context: The pattern must form at a significant resistance level.
• Market condition requirement: After a clear uptrend, this pattern signals a potential top and reversal.

Exit Logic

• Profit target(s): First target at the 38.2% Fibonacci retracement of the preceding uptrend. Second target at the 61.8% retracement.
• Scaling out rules: Cover 50% at the first target.
• Trailing stop rules: Trail the stop above the high of each new lower low candle.
• Exit on signal failure: If the price closes above the high of the second candle (the star), the pattern has failed.
• Exit on opposite signal: A Bullish Engulfing pattern signals an exit.
• Exit on time expiration: If the downward move stalls, exit.
• Exit on momentum loss: Declining volume on the down move indicates fading momentum.

Stop Loss Structure

• Hard stop location: Place the stop loss above the highest point of the pattern.
• Soft stop rules: N/A.
• Maximum dollar loss per trade: Risk should not exceed 1% of capital.
• Maximum percent loss per trade: N/A.
• Structural stop placement: The stop is placed above the key resistance level.

Risk Management Framework

• Risk per trade: 1% of capital.
• Maximum daily loss limit: 2%.
• Maximum weekly loss limit: 5%.
• Maximum drawdown allowed: 15%.
• Risk-reward ratio requirement: Minimum 1:2.

Position Sizing Model

• Recommended sizing approach: Size based on the dollar risk.
• Volatility-based adjustment: Reduce size in high volatility.
• Conviction-based sizing (A+/A/B setup): A+ for a pattern at major weekly resistance with bearish divergence. A for a pattern at daily resistance. B for a less-defined pattern.
• Scaling in rules: Add to the position on a break of a key support level.
• Scaling out rules: Scale out at multiple profit targets.

Trade Filtering

• Market conditions to avoid: A very strong, persistent uptrend.
• Specific setups required: A textbook Evening Star pattern at a pre-identified resistance zone.
• Stock/instrument requirements: Any liquid instrument.
• Time of day restrictions: N/A.
• Chop/news avoidance rules: Ensure no major bullish news is driving the uptrend.

Context Framework

• Trend direction assessment: This is a reversal pattern, so it appears at the end of an uptrend.
• VWAP relationship: Entry will be above VWAP; the goal is for the price to break and hold below VWAP.
• Moving average relationship: The pattern often forms after the price has become extended to the upside, far from the 50 or 200 EMA.
• Range location: Occurs in the upper part of the trading range.
• Higher timeframe alignment: Bearish divergence on the MACD or RSI on a higher timeframe adds confirmation.

Trade Management Rules

• When to move stop to breakeven: After the first profit target is reached.
• When to scale out: At Fibonacci retracement levels.
• When to add size: On a successful retest of the breakdown level.
• How to handle fast moves vs slow moves: A fast, impulsive move down is expected. A slow, grinding move is a warning.

Time Rules

• Optimal trading window: N/A.
• Times to avoid: Illiquid market conditions.
• Session-specific notes: N/A.

Setup Classification

• A+ setup criteria: An Evening Star with a Doji as the second candle, a large gap, and massive volume on the third candle, all at a major resistance confluence.
• A setup criteria: A standard Evening Star at a clear resistance level.
• B setup criteria: A pattern where the third candle does not close at least halfway into the first candle's body.
• C setup criteria (avoid): A pattern that forms in the middle of a range.

Market Selection Criteria

• Instrument requirements: Any liquid instrument.
• Volume/liquidity requirements: Adequate volume is crucial.
• Volatility requirements: Moderate to high volatility.

Statistical Edge Metrics

• Expected win rate: 60-65%
• Average win size: 2.5R
• Average loss size: 1R
• Profit factor: 1.8 - 2.2
• Expectancy per trade: At least 0.6R.

Failure Conditions

• Market conditions where strategy fails: In a market dominated by overwhelming buying pressure.
• Specific scenarios to avoid: An Evening Star that is not at a clear resistance level.

Psychological Rules

• Key mental discipline requirements: Requires selling when sentiment is bullish. Must have the patience to wait for the full three-candle pattern to complete.

Advanced Components

• Market regime detection: Use the RSI to confirm overbought conditions (RSI > 70).
• Volatility/liquidity filters: N/A.
• Correlation filters: N/A.
• Multi-timeframe alignment: An Evening Star on a daily chart at a weekly resistance level is a very powerful signal.

Location

• Where this setup is strongest: At the top of a well-defined channel or after a clear ABC correction in a larger downtrend.
• Where this setup is weakest: When it appears in a choppy, sideways market.
• Location changes outcome: Its formation at a major resistance level after a significant uptrend is what gives the pattern its predictive power.