Understanding how to effectively trade this bearish single-candle pattern can enhance a currency trader’s ability to make better trading decisions. The following sections will explore the key elements of trading the shooting star candlestick pattern, including trade entry, setting a stop loss and taking profits. It possesses a long upper shadow that typically runs at least twice the length of the body, while the lower shadow is usually small or absent. The shooting star candlestick pattern is a valuable tool for forex traders to identify potential reversals in the market.
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 if it occurs near a level that has been deemed important by other forms of technical analysis. 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. 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.
- It indicates that the bulls, who were in control during the uptrend, are losing their strength, and the bears might take over the market soon.
- It’s important to note that there is nothing magical about the nine period simple moving average line.
- The chart above shows two examples of a shooting star forex pattern (marked with ovals) that formed right at the end of periods when price advanced higher, followed by bearish reversals.
- When it comes to trading forex, one of the most important skills to master is the ability to identify and interpret different candlestick patterns.
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Trading the Shooting Star Candlestick
However, the pattern is not flawless and requires the use of other technical indicators to confirm the signals. There are several candlestick patterns, but you shouldn’t confuse yourself to finding the best one. The colour of the shooting star pattern does not matter, either green or red. During the previous candles, the bulls have been in control, pushing the prices higher and into an established uptrend. Trading the retest of the wick would allow a trader to capture a better risk-to-reward ratio than simply entering on the open of the subsequent candle (black dashed line). The bulls, however, could not maintain the price move higher, as sellers came in and overwhelm the buyers with their supply-side orders.
The shooting star pattern must occur above this uptrend line, and the price must break below this trendline within five bars of the shooting star formation. The actual sell signal will be triggered upon a candle close below this upsloping trendline, assuming that the other conditions have been met. As long as forex shooting star we can see that the price action is moving higher, with successively higher highs and higher lows, then we can be confident that an uptrend is in place. Once this condition has been confirmed, along with all the requirements for a valid shooting star pattern, then we will prepare for a potential short trade.
Notice that immediately following the bearish shooting star formation, that the price continues to move lower, in concert with the larger bearish trend. This is an example of a shooting star forming within the context of a larger bearish price move. And that is to say that we should expect downward price pressure following a confirmed shooting star pattern. Depending on your comfort level and style of trading, you may choose one entry method over the other or choose some other variation altogether.
How to Trade the Shooting Star Candlestick in Forex
The shadow of the candlestick always shows a price rejection from a certain price level. For example, sellers are already waiting for their sell orders to be filled when buyers push the price. When sell orders are triggered from a certain level, the price will decrease again, showing sellers’ dominance over the buyers. Because buyers could not keep on pushing the price up, they had ended up against the sellers.
How to Trade Shooting Star Candlestick Patterns
Information such as investors’ sentiment and emotions can often be determined by the candlesticks’ shape, magnitude, and colors. 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. 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. Risk management is important to incorporate when using this candlestick pattern. This provides the trader with a ‘safety net’ should the market move negatively.
Understanding the Shooting Star Pattern
Also, the upper wick represents the buyers who were in a strong position during the day, but now they may be losing control because of the price drop. The additional confirmation methods explained in this article play an important role in identifying the shooting star candles that may lead to the highest probability set-ups. With additional confirmation based on the red candlestick and volume indicator, the next step in our strategy will explain how and where to place entry, stop-loss, and target orders. The bullish momentum leading up to the shooting star forex pattern has therefore suddenly shifted to favor the bears; this could be seen as an early warning sign that price is about to reverse lower. Candlestick charts are most technical traders’ favorite type by far, simply because they reveal more useful information visually than other charting methods.
Target orders were placed at levels that offered double the reward versus the risk taken for each trade. This is called a risk versus reward ratio, and a sensible trading strategy will always aim for a target larger than your potential risk. This is the simple psychology behind the shooting star candle that every retail trader must learn in technical analysis.
While many types of traders can benefit from using the shooting star candle, they should remember to avoid using it in isolation. Consider using other technical analysis tools, confirmation signals and the overall market context to make better trading decisions based on the shooting star. You will also need to manage your risk and money appropriately for the best results.
It has all of the characteristics that we like to see within the structure. Here, we will be looking for a valid shooting star pattern that occurs in the context of a downtrend. The shooting star pattern must still occur after a price move higher, however in this case, that price rise should be a correction to the larger downtrend.
The Hammer only matters after a serious decline, when the market is oversold. In a downward movement, the bears bump at a strong support level that lets the bulls find a foothold and try to reverse the market upwards. The long lower shadow of the candlestick demonstrates the power of the bulls and their readiness to fight back.