The shooting star pattern in candlestick trading can signify a potential change in an uptrend and a bearish reversal on the price chart of a security. This candlestick pattern is revealed over a single trading period but will need the following days to show confirmation.
A shooting star is a bearish candle that only occurs after an uptrend. This pattern features a large upper shadow and little to no lower shadow. It also features a small real body that opens and closes near the low of the day. A shooting star can signify a bearish reversal in an uptrend.
Almost as significant as the shooting star pattern is what happens after. Different forms of confirmation will indicate what you can expect from a security following the appearance of this pattern.
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How to Identify Shooting Star Pattern in Candlestick Trading
Shooting star pattern is relatively easy to spot and confirm on the price chart of a security. To ensure that you never encounter any issues in identifying this candlestick pattern, let us briefly discuss its construction and key characteristics in the following sections –
Construction of Shooting Star Pattern
The shooting star is composed of only a single candlestick. This candlestick is named a shooting star because it resembles a star falling from the sky. That falling trajectory is the trend that this pattern is supposed to signal.
Saying that a shooting star candle has a small real body and a large upper shadow doesn’t wholly explain the pattern.
Generally, the upper shadow should be about three times as large as the real body. Ideally, there should be no lower shadow, but if one does exist, it will need to be very minimal.
The real body of the pattern can be either red (black) or green (white). A red body simply shows that the pattern is more bearish than if it were green.
This pattern is preceded by at least three days of gains within the market and features a long upper shadow. This upper shadow produces new highs for the security during this uptrend.
The small real body of the pattern shows that by the end of the day, the security is beginning to sell closer to the open price.
Key Characteristics of Shooting Star Pattern
Described below are the key characteristics of a shooting star pattern, that you must remember when identifying this pattern on the price chart of a security –
- Uptrend: The shooting star pattern can only take place after an uptrend within the market; after at least three periods of steady highs.
- Upper Shadow: The price of the security will open and increase sharply throughout the day, showing a continuance of the current trend.
- Lower Shadow: As the price drops towards the end of the day, you may see new lows that dip below the opening for the day. Ideally, this feature won’t exist or will remain very small.
- Closing: Because of the price dropping at the end of the day, the closing price should be near the opening. The security could be higher or lower than the open as long as the price is close.
How to Interpret the Shooting Star Pattern?
As we’ve discussed throughout, for a shooting star pattern to be valid, it must come after an uptrend within the market. The highs that are shown by the upper shadow are from buyers remaining confident that the trend will continue.
The bears then step in, gaining ground by beating the price back down closer to the security’s opening.
The price reverting down near the opening shows the uptrend may be over, and the seller may now have control of the market.
The long upper shadow shows how the bulls may have failed to continue the rising of the market.
How to Improve the Reliability of Shooting Star Pattern in Candlestick Trading?
Confirming that the shooting star is the beginning of a downtrend within the market is incredibly important.
Note: Seeing this pattern alone isn’t enough information to decide to sell the security. You’ll want to check the following candlestick to avoid a false positive.
If the candle following the shooting star closes lower than the low of the shooting star, then the likelihood of a reversal in the current trend is confirmed.
You can increase confirmation if the shooting star takes place close to a resistance line.
This line of resistance is essentially the highest a price will go before being pulled back down toward the averages.
If a shooting star is by the resistance line, then it is safe to assume that you will see a trend reversal.
How to Trade Using Shooting Star Pattern in Candlestick Trading?
As already discussed, shooting star is a reversal pattern that indicates that the uptrend on the price chart of a security is near completion and that a bearish reversal is likely. Therefore, this pattern is of particular interest for short-sellers.
When identifying short selling opportunities leveraging the shooting star pattern, you might find value in considering the following factors in your trading plan –
Market Environment
A range-bound market environment is going to be the most successful environment for a short seller.
The advantage of a range-bound market for a short seller is they can rely on both:
- The patterns that they find in the daily candlesticks and
- The resistance/support levels of security.
Reliable resistance and support levels make confirming a pattern, such as a shooting star, much more straightforward because as the price of the security rises inherently, resistance levels hold down the price. If a shooting star appears by this level, you know that the price will drop, and a more aggressive decision can be executed, such as selling short and buying at the support level.
Identify and Confirm Trade Opportunity
If the market has been in an uptrend, and the trader notices the formation of a shooting star, they have a pretty clear indication that the market is reversing.
Depending on the aggression of the trader, they may wait an extra day for further confirmation. Acting fast can increase profits, but it is a riskier move if the pattern produces a false positive.
Determine Trade Entry, Stop Loss, and Take Profit Levels
We have discussed how to figure out when a shooting star pattern appears within a candlestick chart, so we have the foundation for determining entry.
Trade Entry
You’ll want to ensure that the shooting star appears after an upward trend within the market.
Once you see the shooting star, you will want to wait for confirmation.
If the next candle follows the bearish trend and closes lower than the low of the shooting star, you have reversal confirmation. You will want to enter the trade at the point of verification.
Stop Loss
For a short seller, place a stop loss on the high of the initial candle or the second confirming candle if you choose to wait.
Putting it on the first candle is a riskier stop loss than the second candle.
Take Profit Level
You can set your take profit level, or buy level for a short seller, at the most recent low before the uptrend in price started.
Generally, though, you need to make sure that you are acting on a 1:2 risk/reward ratio.
Execute and Manage Trade
If there was a false positive on the anticipated market reversal, you might want to take your profits before you hit your stop loss to minimize the profit loss you’re going to take.
Advantages and Limitation of Trading Shooting Star Patterns
Even though shooting star has proved itself to be one of the more reliable candlestick patterns, it does come with its own set of advantages and limitations. To profitably trade using this pattern, it is critical that you account for these factors in your trading plan.
Therefore, in the following sections, let us discuss some of the key pros and cons of trading a shooting star pattern.
Advantages of Trading Shooting Star Patterns
Listed below are some of the primary advantages of trading shooting star pattern that you must consider in your trading plan –
- It is relatively easy to identify and confirm this pattern on the price chart of a security
- It is a reliable indicator of an upcoming reversal in the price trend of a security
- When combined with the concept of resistance, trading signals generated by this pattern can be unbelievably accurate
Limitations of Trading Shooting Star Patterns
Listed below are some of the primary limitations of trading shooting star pattern that you must consider in your trading plan –
- It is rarely reliable as a standalone indicator and will almost always need to be combined with other indicators
- After the formation of a shooting star pattern, uptrend may continue after a brief decline
Candlestick Pattern Opposite to Shooting Star Pattern
The trading pattern that is the opposite of the shooting star is the inverted hammer.
These two patterns are identical with:
- A small real body,
- Little to no lower shadow, and
- A large upper shadow.
What sets these two patterns apart is the trend they are reversing. The inverted hammer appears after a downtrend and signifies a reversal to a potential uptrend.
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Conclusion
The shooting star pattern is reasonably reliable in a candlestick chart.
It is an ideal pattern for beginners since it is so easily recognizable and can be confirmed simply. Always use a confirmation, so the information supports the decisions that you make.
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