Shooting Star: What It Means in Stock Trading, With an Example

shooting star candlestick

Setting a stop loss just above the Shooting Star’s high can be a wise move. The real body of a Shooting Star, small and situated at the lower end of the trading range, indicates a close near the open. A red body strengthens the bearish outlook, while a green one slightly weakens it.

Identifying Price Reversals

The difference between the hammer and shooting star candlestick is that the Hammer looks like a “T” shape. Probably, the Gravestone Doji resembles the shooting star candlestick Forex the most – the only difference is that the opening price and closing price are equal to the Gravestone Doji. The blue arrows on the image measure and apply three times the size of the shooting star candle pattern.

Overbought and Oversold Market Conditions

A trader could simply enter on the open of the next candle or, if the trader was more conservative and wanted to capture a better risk-to-reward ratio, trade the retest of the wick (black dashed line). Both have a long upper wick, which is twice the size of their body, and both have a tiny lower wick or sometimes even don’t have one. With this pattern, we need confirmation cause we are not sure that the uptrend has now changed to a downtrend. If a shooting star is found after 2 or 3 strong bullish candles, then there is a high probability that this will work great as a reversal.

Further reading on how to trade with Candlesticks

This candlestick pattern is often revealed at the bottom of a downtrend, support level or pullback. Shooting Star Candlestick Pattern is a bearish reversal candlestick pattern. It has a small body, and the upper wick size is at least twice the size of the body. There are more than 40 types of candlesticks which are classified into three main categories including bullish candlestick patterns, bearish candlestick patterns and continuation candlestick patterns.

Waiting for confirmation/false signal

Furthermore, waiting for confirmation helps traders avoid entering trades prematurely. Since the shooting star pattern is a bearish candlestick pattern, it’s easy to understand why the first candlestick pattern is red. The main difference between the Shooting Star and the Inverted Hammer lies in their market implications and position in a trend. While both have similar structures, a Shooting Star appears after an uptrend indicating a potential bearish reversal. In contrast, an Inverted Hammer occurs after a downtrend, suggesting a possible bullish reversal. Understanding these nuances is essential for accurate market analysis and decision-making.

Receive $50 for you and your friend when you convert them into an active trader of ThinkMarkets. Harness past market data to forecast price direction and anticipate market moves. No matter your experience level, download our free trading guides and develop your skills. Typically, a reading of more than 20 indicates that the market is in a strong trend, if you use the standard setting for the length, which is 14. To exit the trade, we’ll use a simple time exit, and get out of the trade after 5 bars. If the RSI is high, then the market is overbought, and more likely to turn around soon.

This pattern, especially when occurring in an uptrend, suggests that the buyers are losing control to the sellers. It’s a sign of market exhaustion from the buyers’ side, indicating that an uptrend may be nearing its end. However, traders should seek confirmation from subsequent candles or other technical indicators before making a decision. In my experience, premature reactions to a single pattern without confirmation often lead to misjudgments. Utilizing the Shooting Star pattern effectively in trading requires understanding its implications and acting accordingly.

The upper red line shows our stop-loss, which is around 20 pips above the session’s high. Any move to these levels where our stopp-loss is means that the pair is in a breakout territory and there is no reversal. In the middle part of the chart, the price action starts to move gradually higher. As the market continues in the direction of the uptrend, the market sentiment is bullish. Most people believe that the market is going to continue making new highs, and as such, they’re holding long positions.

Both are reversal patterns, which means that an inverted hammer signals a positive reversal, while a shooting star, as we’ve learned, signals a negative reversal. The Shooting Star candlestick pattern is a valuable tool in technical analysis, but its accuracy isn’t absolute. The pattern’s reliability increases when combined with other technical indicators and analysis methods. From my experience, considering volume, trend strength, and market sentiment alongside the Shooting Star enhances its predictive accuracy. The key is to look for these patterns in the right context — primarily after an uptrend.

  1. The Shooting Star candlestick pattern is a compelling tool in the toolbox of technical analysis, offering crucial insights into market trends.
  2. Typically, a reading of more than 20 indicates that the market is in a strong trend, if you use the standard setting for the length, which is 14.
  3. A price increase that immediately follows a shooting star could also imply the formation of a resistance area around the candlestick.
  4. In 2011, Mr. Pines started his own consulting firm through which he advises law firms and investment professionals on issues related to trading, and derivatives.

You’ll find that two trading strategies even within the same market could work differently with regards to volatility levels. The best way to ascertain what works is with backtesting, where you use historical data to gauge the effectiveness of different filters. Candlestick patterns seldom work that well on their own and need further validation to be of good use. This means that you need to apply filters and additional conditions to ensure that the shooting star you’re acting on isn’t a false signal.

The presence of a Bullish Shooting Star may indicate that sellers are losing steam and a bullish reversal could be imminent, offering a potential entry point for buyers. The shooting star candlestick pattern is not a standalone trading strategy and should always be confirmed with other technical indicators or analysis tools. Bullish candlestick patterns include those candlesticks which signal bullish trend reversals such as hammer, piercing pattern, bullish harami, morning star, inverted hammer, tweezer bottom etc.

In the technical analysis of a shooting star candlestick pattern, there are three things to be considered. The image below depicts the three things that are to be kept in mind while reading the shooting star candlestick pattern in technical analysis. A red shooting star indicates that the closing price of the security is below its opening price. The red shooting star candlestick is considered a more powerful indicator of an oncoming bearish trend as the closing price is at the very end of the candlestick. The opposite of a shooting star candlestick would be a candlestick with a small real body near the top, and a long lower shadow – known as the hammer candlestick. This upside down shooting star indicates potential bullish momentum instead of bearish.

The green body signifies that the opening price is lower than the closing price, although the two are very close. The red body signifies that the opening price is greater than the closing price. The first thing to be kept in mind while trading with shooting star candlesticks is deciding on the entry point. As seen in the image above, a shooting star occurs at the end of a bullish uptrend. Investors must enter the trade only when the trend is bullish and the security price is on the increase. The shooting star pattern must be confirmed once an active bullish trend has been identified.

Shooting Star candlestick pattern is among the most popular patterns traders use to identify a potential trend reversal. Investors and traders must ideally analyse the patterns that follow a shooting star for three days, to make careful and well-thought-out trading decisions. Now that we’ve covered the shooting star candlestick pattern meaning, let’s look at some real shooting star candlestick chart pattern examples so you can see exactly what to look for on a stock chart. This is why the shooting star is a reversal pattern, as it implies price rejection at higher levels. Since the pattern occurs at the end of swing highs, which are often resistance levels, it signals a potential downward reversal. In candlestick analysis, the shooting star pattern is a bearish reversal pattern that consists of just one candlestick and forms after a price swing high.

In such cases, the shooting star candle is likely to have an even bigger upper candlewick. This implies that the price is about to reverse with even bigger strength. If the closing price is above the opening price, then normally a green or hollow candlestick (white with black outline) is shown. If the opening price is above the closing price then a filled (normally red or black) candlestick is drawn. Thus, although the buyers were successful in pushing for a new high, they failed to force a close near the session’s high.

It may also occur during a period of overall rising prices, even if a few recent candles were bearish. In a downtrend, it indicates a buying pressure, followed by a selling pressure that was not strong enough to drive the market price down. The inverse hammer suggests that buyers will soon have control of the market. A hammer shows that although there were selling pressures during the day, ultimately a strong buying pressure drove the price back up.

shooting star candlestick

This shooting pattern gets its name from its shooting star-like appearance on a candlestick chart where the price is coming down to earth. An Inverted Shooting Star candlestick is essentially an Inverted Hammer, typically indicating bullish reversal potential when occurring after a downtrend. Risk management is important to incorporate when using this candlestick pattern. This provides the trader with a ‘safety net’ should the market move negatively. Confirmation requires closing the next candle below the shooting star’s low/close. The high made by the shooting star may work as resistance for the next few candles.

Investors who make trading strategies solely based on a single shooting star candlestick pattern expose themselves to the risk of incurring losses through false signals produced. A shooting star candlestick pattern can be profitable depending on the investor or trader in question and the investment strategy adopted by them. Shorting or taking long positions tends to be profitable as long as the investment strategy is developed with sufficient study and analysis. It is advisable to always study the two or three candlestick patterns that follow the shooting star patterns to first confirm the downtrend and eliminate any false signals.

The reliability of a Shooting Star in technical analysis is contingent on context and confirmation. It’s a potent bearish signal post an uptrend, but its effectiveness is amplified when corroborated by other technical factors. Traders should always look for additional evidence before making a decision based solely on a Shooting Star pattern. Once identified, particularly after an uptrend, it’s prudent to wait for additional confirmation, such as a bearish follow-up candlestick or a break below a support area.

If a shooting star forms near a significant resistance level, it strengthens the bearish bias, whereas if it occurs near a support level, it may signal a potential bounce. Let’s learn how professional crypto and stock traders make money with this single candlestick pattern. The frequency of the Shooting Star candlestick pattern in markets varies. It’s not an everyday occurrence but appears often enough for traders to recognize and capitalize on its implications when it does appear.

Traders use shooting star candlestick patterns to forecast upcoming bearish trends, interpreting the price decline as a sign of sellers dominating the market. When trading with shooting stars, investors focus on entry points, stop-loss strategies, and profit targets. A shooting star candlestick is structured by a small body, a long upper shadow or wick indicating the increase in price and buying pressure and a short lower shadow or wick indicating the price drop.

As we will discuss in a moment, the psychology behind these candles are everything. The Shooting Star is a candlestick pattern to help traders visually see where resistance and supply shooting star candlestick is located. At one point, there is a new high in place, above the horizontal resistance. However, the buyers lose control over the price action, which initiates the pullback.

The only differences between that inverted hammer and the shooting star are that the inverted hammer occurs in a downtrend instead of an uptrend. The first candle must open below the previous candle’s close; this isn’t a requirement in the shooting star. It appears after an uptrend and indicates that the market could be topping out.

Ideally, the candle after the shooting star gaps lower or opens near the prior close and then moves lower on heavy volume. A down day after a shooting star helps confirm the price reversal and indicates the price could continue to fall. The shooting star candle is most effective when it forms after a series of three or more consecutive rising candles with higher highs.

The color of the body does not matter, although a red body is more powerful than a green one. At first glance, the shooting star looks like a candle with a long “tail” on the top, kind of like a comet streaking across the sky. See the chart of Bruker Corporation’s stock (BRKR) chart below showing a triple top chart pattern. Our maximum loss will be equal to the distance between the level we short HPQ and the level of the stop loss order.

This article will cover the shooting star reversal pattern in depth and how to use it to trade forex. As shown in the above example, the shooting star candlestick pattern appears at the top of the uptrend. As you see, the shooting star candle pattern gives us an indication that the trend might reverse.

These data-driven, professional traders added to their ether using history as their guide. Limitations of Shooting Star Candlestick Patterns are that this pattern may not work well in a ranging market or a market that is not trending strongly. After that, on the next candle, close below that candle’s low, which activates our entry.

While this might seem easy to see with plain eye-sight, we also want to use a quantifiable condition. That way we can make sure that the market has gone up enough to improve our odds of success. While this indeed sounds great, it’s hard, if not impossible, to tell what happened in the market at any given time. As such, the following discussion should be seen merely as an example of what the market might have been up to when forming the shooting star pattern. Professional, data-driven forex traders short after the price moves above and then back below the shooting star high, setting a stop loss of one ATR.

At this point, the longs who were late to the party begin to get scared and start to sell out as well. This panic long selling and short selling leads to a sharp reversal in the price action, thus generating a small candlestick body on the chart. The answer to this question is hidden in the price direction before the creation of the candle. If the price rises after a shooting star, the price range of the shooting star may still act as resistance.

For beginners, it’s important to use this pattern in conjunction with other technical analysis tools and not in isolation. Over the years, I’ve found that confirmation from support levels or other candlestick patterns, like the Doji, can enhance the reliability of a Shooting Star indication. In my trading experience, the Shooting Star has been instrumental in providing early warnings of market shifts, allowing for timely adjustments in trading strategies. It’s also a great educational tool for beginners, teaching them to read and interpret market signals. The key to maximizing the benefits of this pattern lies in its combination with other technical analysis tools and indicators. This holistic approach enhances decision-making, leading to more informed and potentially profitable trades.

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