What is Shooting Star Candlestick Pattern in Trading?
The shooting star candlestick pattern is considered to be a bearish reversal candlestick pattern that generally appears at the top of uptrends. When the open, low, and close prices are almost the same, the shooting star formation is formed. To be termed a shooting star, a candlestick must form during a price gain. And, the gap between the day’s highest price and the opening price should be more than two times the size of the shooting star’s body with little to no shadow beneath the body.
This blog is a beginner’s guide to shooting star candlestick patterns in trading. Read on to know how to identify and interpret it, how to trade with shooting star candlestick, their benefits and limitations.
How to Identify a Shooting Star Candlestick?
Similar to other candlestick patterns, traders who properly spot the shooting star candlestick can reap significant benefits. The key features of the shooting star candlestick pattern are as follows:
The upper tail is the line that forms directly above the candlestick body and is also referred to as the shadow. The upper tail is about 2 to 3 times longer than the total body of the candlestick. Additionally, the lower tail is very short or basically non-existent and reaches below the body of the candlestick. When it exists, it is no longer than the body of the candlestick.
The candlestick body shows the stock market’s opening and closing price levels. If it is too short, it suggests that the opening and closing prices are very close to one another. Additionally, the more a shooting star’s characteristics are highlighted in a trading chart, the more powerful the formation is considered to be.
The most important factor in this type of pattern is the closing price. A closing price that is lower than the opening price, for example, represents the net price fall over the time period covered by the candlestick, causing the shooting star candlestick pattern to be stronger.
Another possibility is that the close price is less than the opening price, and no shadow spreads below the body of the candlestick. In that situation, it displays the price closing at its lowest level for the period of the candlestick, which is considered an additional indication of bearishness.
Furthermore, when the upper body of the candlestick is 3 to 4 times longer than the total body, it suggests an impending bearish reversal. This shows that, despite the fact that the traded price was significantly higher during the candlestick duration, traders rejected these prices when sellers entered the market and buyers exited. Eventually, the price falls dramatically and creates the shooting star candlestick pattern.
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How to Use the Shooting Star Candlestick Pattern?
Source: Investopedia
As can be seen above, the stock prices were moving in an uptrend until the shooting star formed. Moreover, there was a price drop confirmation the next day, with the next day’s low being lower than that of the shooting star, which was subsequently followed by a fall in the prices until the next month.
Recognising and acting upon the patterns quickly and meticulously is the key to making profits and minimising losses in the stock market.
How to Interpret Shooting Star Candlestick Pattern?
Following an uptrend, the shooting star candle pattern might suggest to traders that the uptrend may be approaching the end and that long positions should be reduced or entirely withdrawn.
The shooting star candlestick pattern could also be used as a sell signal by aggressive traders. However, in order to evaluate potential sell signals, other indicators should be employed. Wait a day, for instance, to watch if prices continue to decline on other chart indicators.
How to Trade with a Shooting Star Candlestick?
1. Trade Entry
One should confirm the pattern before executing a shooting star trade. Following are a few things one should do while making a trade entry on the shooting star pattern
- Determine an active bullish trend.
- Look for a candle that has a smaller body and a large upper candlewick.
- Wait until a bearish candle breaks the shooting star body’s low point.
- Ensure high volume, indicating heavy supply.
This will validate the reliability of the shooting star on the chart. If one can detect these signals, one might want to sell the security, as a downward price movement could be on the way.
2. Stop Loss
While trading the shooting star candle pattern, one should always employ a stop-loss order. This is because nothing in share trading is guaranteed, and trading the shooting star pattern may result in false signals and losses thereof.
3. Take Profits
Generally, one can expect the market prices to move 3 times the length of the shooting star, including the wick. Profit expectation is therefore expected to be 3:1 the size of the candlestick. One can take a short position in the market upon the candle’s formation and set price targets accordingly.
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Benefits of Using Shooting Star Candlestick Pattern
- It is a good strategy for all traders, particularly beginners.
- This pattern is simple to recognise
- It is fairly reliable as long as all of the qualifying criteria are met.
Limitations of Shooting Star
Prices fluctuate rather quickly. As a result, during an uptrend, one candle is not very noteworthy. Bears in control for a portion of one period, such as in a shooting star, maybe insignificant, which is why confirmation is essential.
It has also been observed that following a small fall, prices continue to rise in keeping with the long-term uptrend making it a ‘dead cat bounce‘. Therefore, when employing candlesticks, using stop losses to minimise potential risks is a must.
It should be noted that a candlestick pattern may be more noteworthy if it occurs around a level considered significant by other methods of technical analysis and must therefore be used in conjunction with other indicators.
Difference Between Shooting Star and Inverted Hammer
The inverted hammer and the shooting star candlestick have the same appearance. Both exhibit long upper shadows and little real bodies near the candle’s low point, with little or no bottom shadow. The context in which they appear brings out the difference.
A shooting star appears after a price gain and indicates a potential price downtrend. An inverted hammer, on the other hand, appears after a price fall and indicates a potential upward trend.
Final Word
A shooting star candlestick is an important technical indicator that indicates a bearish reversal occurring at the top of an uptrend. When a trader employs a shooting star pattern, it is essential to take risk management measures. This provides the trader with a ‘safety net’ in the event that the market somehow doesn’t move in the anticipated direction. A trader must confirm the signal by checking other technical indicators before acting on the pattern formation.
FAQs
Ans: A bearish market refers to the market condition wherein the stock prices fall for an extended period. It is important to know when the market is bearish or bullish to make trading decisions.
Ans: Shooting star candlestick patterns are one of the most reliable candlestick chart patterns. However, one cannot use this pattern in isolation and must look at other indicators to get confirmation on the price signals.
Ans: The inverted hammer candlestick in an uptrend is a bullish analysis tool that indicates market divergence from a bearish trend to a bullish rally. An inverted hammer is also referred to as the inverted shooting star pattern. It has a lengthy upper shadow and tight open, close, and low pricing, exactly like the shooting star.
Ans: Dead cat bounce occurs when an asset’s price suddenly rises during a continued decline. However, it is short-lived, and the downtrend soon resumes. A dead cat bounce at first may seem to be a reversal of the current trend but is swiftly followed by a continuation of the downward price movement.
Ans: A stop-loss order is an advance order to sell an asset when it hits a certain price threshold. It is used to minimise a trade’s loss or gain. This concept can be applied to both short-term and long-term trading.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
