Candlestick patterns and structures of arrangement have their own meaning and it aid decision-making for traders. They provide insights on how prices may behave and could carry signal for entry points for your trades.
One of such pattern is the shooting star candlestick pattern in trading. It signals a bearish reversal trend of the market.
In this guide we will explain what the shooting star pattern is, its advantages and requirements, how it works, and how it can be used whether you are conservative or balanced, with an example.
What is the Shooting Star candlestick?
The Shooting star candlestick pattern is a bearish reversal candlestick formed at the top of an uptrend, with a small body with a small or non-existent lower wick and a long upper wick.
The shooting star candlestick is the one at the uptrend before the reversal, with a long upper wick. The long upper wick and the small or non-existent lower wick is formed when the asset price open and rose to a high price within the timeframe and pushed downward by the bears. This makes the asset price open and close at roughly the same price.
By implication, the bears are ready to take over the market and therefore, the bearish reversal pattern is evident.
Summarily, the shooting star candlestick pattern shows:
- Pattern: Change
- Trend: Bearish
- Reliability: Medium-Low
This chartist figure arises in bullish trends and warns the investor of the possibility that the market trend turns or changes direction, in this case from bullish to bearish. Normally, this figure appears in resistance zones, showing indecision when overcoming.
In this case, its reliability is not the best of all, and it is certainly not infallible, therefore it is ideal for traders to complement it with other technical signals that confirm what the pattern is indicating to them, such as resistances, Fibonacci levels, moving averages, technical indicators, etc.
How does the Shooting Star work?
There are three characteristics that the shooting star pattern presents:
- Strong opening session
- Price drop during the session
- Close price similar to the opening price
Generally, it can be said that when the shooting star candlestick is seen in a bullish trend with a hope of a bearish reversal, it means the bears are getting to the market. Before the candlestick, the bulls dominate the market and while the bears are getting back, completion starts between the trading parties. Hence, showing on the shooting star candlestick.
The shooting star candlestick price opens and advances substantially, and then the bears push it back to close near the opening price. The pushing therefore creates a long upper wick and give a chance of price reversal if the bears continue to dominate
- The market must be in an upward trend, that is, it must be rising.
- The shooting star appears, that is, a candle with a not large body and a wick at least twice as long as the body, and a small or non-existent lower wick. As a general rule, the larger the upper shadow or wick, the more reliable this chartist figure will be.
- To know if it has given the signal officially, we have to observe if the opening of the next candle has occurred below the body of the shooting star candle and the close as well.
What is the psychology behind a Shooting Star candlestick?
This pattern forms along an upward movement and indicates that the price could start to drop.
In other words, the price is approaching a resistance zone. The session starts strong, and it seems that the price is going to break, it is going with force. However, when it gets very close to the resistance zone, buyers start to sell, to end up closing at a price similar to the one it opened, sometimes positive, sometimes negative, but in any case, leaving certain signs of weakness.
However, a bearish pattern because the price tried to rise significantly, but in the end the sellers took control and pushed the price to near the opening level.
How to trade the Shooting Star candlestick pattern
You can trade the Shooting Star candlestick pattern on the chart of any asset provided you can spot it. Remember that the shooting star indicates a negative reversal, and you can take advantage of it on any asset you are trading as CFDs or spread bets.
Follow the steps below to spot the shooting star candlestick pattern and place your trader:
- Open a broker account or Log in to your account if you already have one
- Look for the financial instrument/asset you want to trade. If your broker have search bar, enter the asset to find.
- Look into the asset chart and check for the probability of finding a shooting star candlestick along the uptrend.
- Enter your position size
- Confirm your ‘sell' ticket
How does a Shooting Star candlestick differ from an Inverted Hammer candlestick?
Special care must be taken not to confuse a shooting star with another technical pattern known as inverted hammer.
Both patterns present a longer upper wick or shadow and a small body. However, the big difference is where each pattern appears.
The inverted hammer appears in the final stretch of a bearish trend and warns of a possible change from a bearish to a bullish trend.
On the other hand, the shooting star appears in the final stretch of an upward trend and alerts of a possible change in market direction from bullish to bearish.
Otherwise, the shooting star candle is very similar in both cases, it presents a small body and a long upper wick.
How to trade a Shooting Star in trading?
When it comes to trading with the shooting star there are two ways or methods, depending on the trader's profile. Let's look at each of them below:
A trader whose portfolio is conservative needs some confirmation, so they wait for several candles to sell.
Specifically, what they would do is to wait several subsequent candles to the shooting star candle to corroborate that indeed a change of trend from bullish to bearish has occurred. They could sell in 3-4 candles after the shooting star.
The stop loss or protection stop would be placed above the high of the shooting star, but giving it a little more margin.
On the previous EUR/USD chart, see where the stop loss would be located
A non-conservative trader who wants to use the balanced version could sell when the next candle to the shooting star candle opens, that is, at the opening. As long as this was lower than the position at which the shooting star closed.
As in the previous case, the stop loss or protection stop would be placed above the high of the shooting star, but giving it a little more margin.
Example of Shooting Star and trend change
In the following chart we have a simple example of the shooting star pattern.
We can see that the requirements are met:
- Uptrend, the market has been rising
- A small body candle appears with a long upper wick and no lower wick.
- Immediately afterwards, a turn occurs and the market stops rising, starting its downtrend.
Pros and Cons of trading a Shooting Star
Among the main advantages and disadvantages of the shooting star pattern we have:
- ✅ It is a simple pattern, in fact, it only consists of one candle.
- ✅ It is quite objective regarding where to buy and where to place the stop loss, so it does not require interpretations.
- ✅ It warns of the possible end of an uptrend and the beginning of a downtrend.
- ✅ It works in any type of market (stocks, indices, currencies, commodities, bonds, cryptocurrencies).
- ❌ It only uses one session, so it is quite incomplete
- ❌ Its reliability is not the best possible.
- ❌ It should be used as a secondary confirmation indicator, but as the main reason when making a trading operation.
All in all, the shooting star is a chartist pattern in trading that indicates a possible trend change from bullish to bearish. It appears after bullish movements and is characterized by a candle with a small body and a long upper wick. Although it is a simple pattern and useful in various markets, its reliability is medium-low, so it is advisable to complement it with other technical signals to confirm its indication.
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FAQs About the Shooting Star candlestick pattern
When do I use a Shooting Star Candlestick?
The shooting star candlestick pattern is a flexible candlestick pattern to predict a possible bearish divergence. The pattern is a useful indicator for trader to exit the market when they are long and make entry for a short position.
How do I Identify the Shooting Star Candlestick in a Chart?
On charts, the shooting star would open, close, and find a low at similar price points. Then you can interprete the shooting star as the closer the price points, the tighter the shooting star and more likely the asset you're speculating will fall.