Pattern trading n.2 Shooting Star

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How to Trade Shooting Star Candlestick Patterns

Trading with Shooting Star Candlesticks: Main Talking Points

Japanese candlesticks are a popular charting technique used by many traders, and the shooting star candle is no exception. This article will cover the shooting star reversal pattern in depth and how to use it to trade forex.

  • What is a shooting star candlestick pattern?
  • Advantages of using the shooting star in technical analysis
  • Trading the shooting star pattern
  • Further reading on how to trade with Candlesticks

What is a shooting star candlestick pattern?

A shooting star formation is a bearish reversal pattern that consists of just one candle. It is formed when the price is pushed higher and immediately rejected lower so that it leaves behind a long wick to the upside. The long wick should take up at least half of the total length of the shooting star candle – see image below.

Additionally, the closing price should be near the low of the candle. As you can see, this creates an overall bearish structure because prices were unable to sustain their higher trade.

A similar structure is observed with the Inverted Hammer pattern however, the Inverted Hammer relates to a bullish reversal signal as opposed to a bearish reversal signal. This candlestick pattern is often revealed at the bottom of a downtrend, support level or pullback.

It is often questioned about the difference between a shooting star formation on a forex pair, stock or commodity. There is no variance between the different financial market types. A shooting star candlestick pattern will offer the same signal/s regardless of the instrument.

Advantages of using the shooting star in technical analysis

The shooting star pattern is a great tool for novice technical traders due to its simplicity. Spotting a potential shooting star candle is straight forward if traders adhere to the pattern description as explained above.

The candle pattern by itself will sometimes be flawed. However, if the pattern appears near a resistance level or trend line, then the shooting star can add confirmation to the new bearish bias. This is because a single candle is not extremely crucial in the overall trend or market movement.

Risk management is important to incorporate when using this candlestick pattern. This provides the trader with a ‘safety net’ should the market move negatively.

Benefits of the Shooting Star candlestick pattern:

  • Easy to identify
  • Reasonably reliable if all criteria are met
  • Suitable for but not limited to novice traders

Limitations of the Shooting Star candlestick pattern:

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  • Shooting Star candle does not dependably define a short trade
  • Confirmation is needed – further technical/fundamental justification

Trading the shooting star pattern

EUR/USD Shooting Star Candlestick Pattern:

Trading this reversal pattern is fairly simple. First, the implication is for lower prices therefore we want to look for entries to short. Since the prices were previously rejected at the high of the shooting star, we will look to establish the stop loss at the recent swing high (red horizontal line on the chart).

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). Retests of the wick tend to occur when the wick is longer than normal.

Often prices will come back and retrace upward a portion of the long wick. A trader recognizing this might wait to enter around the middle of the wick rather than enter immediately after the shooting star candle forms. This means the trader is entering a short trade at a higher price and with a tighter stop loss reducing risk. Regardless of the entry mechanism, the stop loss will remain the same.

Regarding profit targets (blue line), DailyFX communicates taking profit at least twice the distance of the stop loss. So, if the stop loss is 90 pips away from the opening level, then look for at least 180 pips of profit potential. This commonly refers to a 1:2 risk-to-reward ratio which falls in line with the Traits of Successful Traders research.

Shooting Star Definition and Applications

What is a Shooting Star?

A shooting star is a bearish candlestick with a long upper shadow, little or no lower shadow, and a small real body near the low of the day. It appears after an uptrend. Said differently, a shooting star is a type of candlestick that forms when a security opens, advances significantly, but then closes the day near the open again.

For a candlestick to be considered a shooting star, the formation must appear during a price advance. Also, the distance between the highest price of the day and the opening price must be more than twice as large as the shooting star’s body. There should be little to no shadow below the real body.

Key Takeaways

  • A shooting star occurs after an advance and indicates the price could start falling.
  • The formation is bearish because the price tried to rise significantly during the day, but then the sellers took over and pushed the price back down toward the open.
  • Traders typically wait to see what the next candle (period) does following a shooting star. If the price declines during the next period they may sell or short.
  • If the price rises after a shooting star, the formation may have been a false signal or the candle is marking a potential resistance area around the price range of the candle.

What Does the Shooting Star Tell You?

Shooting stars indicate a potential price top and reversal. The shooting star candle is most effective when it forms after a series of three or more consecutive rising candles with higher highs. It may also occur during a period of overall rising prices, even if a few recent candles were bearish.

Following the advance, a shooting star opens and then rises strongly during the day. This shows the same buying pressure seen over the last several periods. As the day progresses, though, the sellers step in and push the price back down to near the open, erasing the gains for the day. This shows that buyers lost control by the close of the day, and the sellers may be taking over.

The long upper shadow represents the buyers who bought during the day but are now in a losing position because the price dropped back to the open.

The candle that forms after the shooting star is what confirms the shooting star candle. The next candle’s high must stay below the high of the shooting star and then proceed to close below the close of the shooting star. 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. Traders may look to sell or short sell.

If the price rises after a shooting star, the price range of the shooting star may still act as resistance. For example, the price may consolidate in the area of the shooting star. If the price ultimately continues to rise, the uptrend is still intact and traders should favor long positions over selling or shorting.

Example of How to Use the Shooting Star

In this example, the stock is rising in an overall uptrend. The uptrend accelerates just prior to the formation of a shooting star. The shooting star shows the price opened and went higher (upper shadow) then closed near the open. The following day closed lower, helping to confirm a potential price move lower. The high of the shooting star was not exceeded and the price moved within a downtrend for the next month. If trading this pattern, the trader could sell any long positions they were in once the confirmation candle was in place.

The Difference Between the Shooting Star and the Inverted Hammer

The inverted hammer and the shooting star look exactly the same. They both have long upper shadows and small real bodies near the low of the candle, with little or no lower shadow. The difference is context. A shooting star occurs after a price advance and marks a potential turning point lower. An inverted hammer occurs after a price decline and marks a potential turning point higher.

Limitations of the Shooting Star

One candle isn’t all that significant in a major uptrend. Prices are always gyrating, so the sellers taking control for part of one period—like in a shooting star—may not end up being significant at all.

This is why confirmation is required. Selling must occur after the shooting star, although even with confirmation there is no guarantee the price will continue to fall, or how far. After a brief decline, the price could keep advancing in alignment with the longer-term uptrend.

Utilize stop losses when using candlesticks, so when they don’t work out your risk is controlled. Also, consider using candlesticks in conjunction with other forms of analysis. A candlestick pattern may take on more significance it occurs near a level that has been deemed important by other forms of technical analysis.

How to Identify & Trade Shooting Star Patterns

Watch our video on how to identify and trade shooting star patterns.

What Is a Shooting Star Candlestick Pattern & How to Identify These Candlesticks?

  • A shooting star candlestick is typically found at the peak of an uptrend or near resistance levels. Shooting star candlesticks consist of a smaller real body with a longer upper wick and no lower shadow. They are typically red or black on stock charts.

Shooting Star patterns are interpreted as a reversal pattern. Shooting stars appear in up trends but are a bearish candle. Watch our video above to learn more about how to trade them.

These patterns look just like inverted hammer candlesticks but are found at a different place on a stock chart. The placement of the candlesticks are what give it a different meaning.

Charts are made of many different Japanese candlesticks patterns. These patterns gauge the emotions of traders all over the world. We trade on the fear and greed of others and candlestick charts allow us to see these emotions.

1. Basics of Shooting Star Patterns

They are single day patterns. It opens higher then trades much higher but ends up closing near it’s open price. It is the bearish answer to the inverted hammer.

They have a small real body with little to now lower wick and a long upper wick. It should be at least two times the size of the real body.

We all know that not every candlestick and pattern are going to be perfect though. That’s why it’s important to study and know all different types of candlesticks and patterns.

Doji candlesticks are indecision candles and while these patterns may look like a doji, it’s not. It means something different (bookmark our daily penny stocks list and swing trade watch lists which are updated daily).

The shooting star has a long upper wick, short real body and either a small lower wick or no lower wick at all.

2. Technicals of Shooting Star Patterns

Shooting star patterns indicate that price has reached its peak and a reversal is coming. This pattern is the most effective when it forms after a series of rising bullish candlesticks.

Each bullish candlestick should create a higher high. Their upper wick is formed as buyers drive price up at some point during the day. But selling pressure pushed price back down so that it closed near the opening.

As price is rising during those green day, buyers start getting impatient wanting a pullback so they can get in at a good price. Remember the stock is already in a bullish uptrend so price has been rising for awhile.

Buyers cause a buying frenzy causing the upper wick to form. This is the greed we’re talking about. Shorts see the and capitalize on said greed. Pushing price back down. Thus a shooting star is formed.

You can see CCL was in an uptrend. There are some bull flag patterns occurring. The shooting star pattern happened in the most obvious bull flag with price making higher highs. After the shooting star formed, price tanked.

3. Confirmation

Confirmation of shooting star patterns are very important. The candle that forms after the shooting star is what confirms the pattern. The next candle can’t make a higher high.

Otherwise the reversal is null and void. The close of the new candle must also close under this pattern. If you look at the chart above, you’ll see that the next candle did in fact close lower.

The second candle closing lower, tells you that the greedy buyers are now taking losses. They either have to hold and wait it out or cut their losses and move on.

Greed usually turns to fear though and the panic selling begins. You can also see that on the chart above as large bearish candlesticks formed; letting you know the bears are in control for now.

How to Trade Shooting Star Candlesticks

  • Knowing how to trade shooting star candlesticks is quite simple:
  • Traders take a short at the break of the low and use a candlestick close above high as a stop.
  • Some may take a long position when price breaks above the high of the candlestick.
  • Then use a candlestick close below the low as a stop level.

1. Technical Analysis

Using technical analysis with shooting star patterns may help you not to get trapped. Candlesticks form key areas of support and resistance. Traders pay close attention to that.

Are the RSI (relative strength index) and MACD (moving average convergence divergence) indicating a stock is over extended? Overextended stocks want to return to equilibrium.

Equilibrium is usually found at the moving average lines such as the simple moving average formula. You can also use the VWAP trading strategy to find equilibrium.

We teach how to trade shooting stars on our live daily streams. Check out our trading service to learn more.

MSFT opened much higher then the previous candle showing gap up patterns. It was far away from the moving average lines and RSI was over bought. It still had a second candle that did not form higher highs and closed lower than the previous day. This formed the shooting star pattern. You can see stock moved back to it’s moving averages.

2. Patterns Within Patterns

Shooting star patterns are daily candlestick patterns. It’s important to see what other pattern it’s a part of. That can tell you when to get out.

We know they can trap buyers causing them to take a loss. If you’re only trading certain moves without look at the overall picture, that could be you.

Look for head and shoulders patterns or inverted cup and handle patterns. Even double or triple top patterns. See the pattern within the bigger patterns. Take our free stock online courses.

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