A shooting star pattern is a bearish reversal pattern that occurs at the end of an uptrend. It is characterized by a small real body (or a small range between the open and closing prices) and a long upper shadow, which is at least twice the length of the real body. The pattern derives its name from the resemblance of a shooting star, with a small body and a long tail. Our entry calls for entering a short position immediately following the close of the confirmed shooting star pattern.
- Any move to these levels where our stopp-loss is means that the pair is in a breakout territory and there is no reversal.
- If you examine the shooting star formation here, it’s quite evident that all of these characteristics have been met.
- Also, there is a long upper shadow, generally defined as at least twice the length of the real body.
- We want the shooting star to either touch or penetrate the upper line of the bearish channel.
This helps ensure that if the market moves against your trade, the stop-loss order will be triggered to limit your potential losses, although it still may be subject to order slippage. 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.
The long upper shadow of the candlestick demonstrates the power of the bears and their eagerness to reverse the market in their direction. The shooting star pattern is named for its resemblance to a shooting star, with the long upper wick representing the tail of the star and the small body representing the head. The shooting star pattern is also sometimes referred to as a pin bar or a hammer.
The candlestick occurs after a bullish trend.
To identify a perfect shooting star candlestick pattern, I will explain this candlestick in three stages. In this post, you’ll learn about the shooting star candlestick pattern’s structure, significance, trading psychology, and trading guide. Putting your stop loss above the shooting star candlestick’s high point or the recent swing high may make sense, depending on the overall market context.
- 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.
- A shooting star candlestick can be either red or green, but the red (or black) shooting star candles provide the strongest bearish sentiment shift signals.
- Brent remains in a consolidation phase at the lower levels of the declining wave.
- In order to do this, we will need to draw an uptrend line that connects the lower swing points within the rising trend.
Those that do take the time to understand the market environment in which the shooting star pattern should be traded, will be better rewarded for their efforts. One of the best ways to trade a rejection pattern such as the shooting star formation within a corrective phase is to first locate a market that is trading within a clearly defined bearish channel. Once we have found such a market, then we would wait for a shooting star formation to form during one of the pullback legs. We want the shooting star to either touch or penetrate the upper line of the bearish channel.
Shooting Star
We want the shooting star pattern to have either touched or penetrated the upper line of the bearish channel. If you look closely at the shooting star formation once again, you will notice that the upper wick did in fact penetrate the upper line of the bearish channel plotted. The entry signal from this pattern set up would occur immediately following the close of the shooting star candle.
Once we have identified these conditions, then we will prepare for a short trade. It’s important to note that there is nothing magical about the nine period simple moving average line. You could just as well use a slightly shorter or longer variation as well. The point is that whichever exit mechanism that you use, you should be consistent in your application of it. A simple yet robust method for trading the shooting star formation as a countertrend setup.
Shooting Star: What It Means in Stock Trading, With an Example
It is important to note that the shooting star pattern is not always a reliable indicator of a reversal. Traders should always use other technical indicators and fundamental analysis to confirm their trading decisions. Candlestick patterns are formed when multiple candlesticks are combined in a specific way. These patterns can provide traders with important information about the direction of the market and can help them make trading decisions.
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The stop loss level can be placed above the shooting star’s high or a significant resistance level, depending on individual trading preferences. Once the shooting star pattern is confirmed, traders can consider different trading strategies to capitalize on the potential reversal. One approach is to wait for the next candlestick to close below the shooting star’s low, indicating a bearish confirmation. This can be seen as a signal to enter a short position or close any existing long positions.
The candlestick for your chosen forex currency pair would open, close, and find a low at similar price points. In this case, the shooting star could be interpreted as the closer the price points, the tighter the shooting star, and the more likely that the currency pair you’re speculating on will fall. The Shooting Star candlestick formation is viewed as a bearish reversal candlestick pattern that typically occurs at the top of uptrends. Now that we have a good understanding of the shooting star pattern and when it is most likely to occur, let’s build upon that knowledge, and see if they can create a trading strategy around it. We’ll start with the of countertrend variation of the shooting star set up. Anytime that you find this formation on the daily chart and wherein it occurs in context of an uptrend, you will want to pay close attention to the price action of the next few bars following it.
In some situations, the price continues to rise after the appearance of the Shooting Star. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74%-89% of retail investor accounts lose money when trading CFDs. You should consider whether you can afford to take the high risk of losing your money. The Shooting Star formation is considered less bearish, but nevertheless bearish when the open and low are roughly the same. The Shooting formation is created when the open, low, and close are roughly the same price.
By understanding the components of the pattern and confirming it with other technical indicators, traders can make informed trading decisions. However, it is important to remember that no pattern or indicator guarantees success forex shooting star in trading. Proper risk management, continuous learning, and a disciplined approach are essential for long-term success in forex trading. Candlestick patterns are an essential tool in technical analysis for forex traders.
You will also generally want to determine a profit target based on your trading strategy, chosen risk-reward ratio and how you view the market’s potential for movement. It also might make sense to use trailing stops to help you lock in and protect profits gained as the market moves in your favor. Look for a shooting star candlestick formation after a sustained uptrend. It is characterized by a small candlestick with a short body and a long upper shadow that extends to at least twice the length of the body. It is often questioned about the difference between a shooting star formation on a forex pair, stock or commodity. A shooting star candlestick pattern will offer the same signal/s regardless of the instrument.
It is characterized by a small body with a long upper shadow and little to no lower shadow. The long upper shadow represents the failed attempt of buyers to push the price higher, while the small body suggests a lack of buying pressure. The shooting star pattern is considered a significant signal because it indicates a shift in market sentiment from bullish to bearish. It suggests that buyers, who were in control during the uptrend, have lost momentum, and sellers are stepping in to push prices lower. However, like any other technical pattern, it is important to confirm the shooting star pattern with other indicators and analysis tools before making trading decisions. Technical analysis is a popular method used by forex traders to forecast future price movements based on historical data.