The Shooting Star is a bearish reversal indicator appearing after an uptrend and is characterized by a short body with a long upper wick. A green Shooting Star Candlestick, while less common, still carries significance. Occurring in an uptrend, it indicates that despite the closing price being higher than the opening, sellers were able to push the price down from its highs significantly.
While the shooting star pattern might indicate a potential sell-off, it can be invalidated if the candlestick pattern is followed by a continuation of the uptrend. However, this is less frequently the case as that uptrend is followed by a price correction towards the downside after such a candlestick pattern has been formed. That’s why it is a pattern in the first place and not just a regular, irrelevant candlestick. The Shooting Star candlestick pattern is a bearish reversal pattern that occurs at the top of an uptrend.
In technical analysis, the Shooting Star candlestick pattern plays a pivotal role in signaling potential bearish reversals. This pattern is a prime example of how candlestick formations can provide insightful information about market sentiment and possible price movements. Its appearance, especially at the bottom of a downtrend, should be analyzed with caution. In my years of trading and teaching, I emphasize the importance of context when interpreting candlestick patterns. A shooting star candlestick pattern can be profitable depending on the investor or trader in question and the investment strategy adopted by them.
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Lawrence has served as an expert witness in a number of high profile trials in US Federal and international courts. The Shooting Star formation is considered less bearish, but nevertheless bearish when the open and low are roughly the same. The fact it’s been traded since the 17th century and still is relevant today speaks volumes about its ease of use and effectiveness. The shooting star can be combined with the clear falling star candlestick resistances you have charted out.
For trend confirmation, investors and traders must look out for the candlestick patterns that follow the shooting star patterns. As the image above depicts, the candlesticks that follow the shooting star pattern depict a price decline with declining closing prices. The trend is considered to have turned bearish only if the pattern following the shooting star also depicts a price drop. In such cases, shooting star candlestick patterns are signals of upcoming bearish price reversals.
Another similar candlestick pattern in look and interpretation to the Shooting Star pattern is the Gravestone Doji. For aggressive traders, the Shooting Star pattern illustrated below could potentially be used as a sell signal. For example, waiting a day to see if prices continued falling or other chart indications such as a break of an upward trendline. In the CSCO chart above, the market began the day testing to find where supply would enter the market. CSCO’s stock price eventually found resistance at the high of the day. The long upper shadow of the Shooting Star implies that the market tested to find where resistance and supply was located.
The pattern is easily identifiable as traders can spot it with an extremely long upper wick, which also signals the market reversal point. In our article, we will learn in-depth about the Shooting Star Candlestick Pattern and how to trade it. On top, this pattern is quite reliable with the support of other reversal patterns.
Strategy 4: Trading The Shooting Star With RSI Divergences
If the RSI shows a value above 70, it suggests that buying pressure has peaked and a reversal might be imminent, making the Shooting Star pattern even more reliable. Pairing the shooting star with Fibonacci retracement levels can give you a more precise entry and exit strategy. This strategy allows for capturing initial market moves while still ensuring some level of confirmation before fully committing to the trade. For example, if your stop-loss is set 2% above your entry price, you might set your profit target at least 4% below your entry price, ensuring a favorable risk-reward ratio.
For traders in a long trade, the shooting star formation could have acted as an exit signal to close the trade. Conversely, traders looking to get in a position could have entered a short on the close of the confirmation candle. Trading this candle involves looking for confirmation of the reversal, such as a bearish candle following the pattern. Traders often set stop-loss orders above the shooting star’s high and target profit levels near key support zones or previous lows. No, the shooting star pattern indicates only a bearish trend, but can also form in an uptrend. The key point is that this candlestick needs confirmation by other patterns or indicators.
The long upper shadow of the Shooting Star trading indicates that prices were pushed up to a high level, but that the bulls were unable to maintain control. This suggests that there may be resistance at that level, and that sellers may be taking control of the market. The small or non-existent lower shadow suggests that there is little to no support at lower levels, which further supports the bearish reversal signal. The Shooting Star and Morning Star patterns are not the same — understanding the distinction is crucial for traders. While both are significant patterns within the realm of candlesticks, they signal different market sentiments.
Using The Shooting Star To Spot Sell Signals
The Shooting Star tells traders that the current uptrend may be weakening and a downtrend could be on the horizon. It’s a visual representation of a shift in market sentiment – from bullish to bearish. This pattern becomes more significant if it appears at a resistance level or after a prolonged price advance.
- This pattern is characterized by a small body with a long upper shadow, similar to its bearish counterpart, but it signals an unsuccessful attempt by bears to drive prices lower.
- The Shooting Star pattern results in a bearish reversal 59% of the time during a bull market, and 60% of the time during a bear market.
- For example, waiting a day to see if prices continued falling or other chart indications such as a break of an upward trendline.
- It’s simple, the Shooting Star pattern is traded when the low of the candle is broken.
- So, combining the shooting star with volume analysis helps traders assess whether the bearish reversal is likely to materialize or if the uptrend is set to continue.
- Conversely, the hanging man is a bearish reversal pattern which forms at resistance levels after a price increase.
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- However, the low success rate indicates it cannot be relied on its own to provide accurate reversal signals.
- First, you need to determine the resistance level since a pattern usually forms on it.
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- A shooting star pattern with a small real body at the bottom of a price range and a long upper shadow that signals a likely peak on the chart.
- The movement from a whitecandle to a second candle with a tall upper shadow and small body illustrates that momentum is fading.
- The open, high, and close prices should be relatively close together, with the high being very close to the open.
The pattern shows prices opened and went higher but closed lower at the end of the day resulting in a long wick and small body. The emergence of a bearish candlestick the following day affirms that momentum had changed from bullish to bearish on bears overpowering the bulls. If looking at the daily chart, the formation of a bearish candlestick after a shooting star pattern confirms price reversal. In this case, traders can look to enter short positions to profit as prices correct from the previous highs to new lows.
In these cases, the price might continue moving upward, and the shooting star would be invalidated. The shooting star chart pattern, when accompanied by solid volume, will give you a sense of how strong the reversal signal is. If the pattern forms with high volume, that suggests significant participation in the failed rally, adding weight to the likelihood of a potential reversal. The pattern signifies that the market tested higher levels but faced selling pressure, with sellers pushing the price back down to close near the opening price. The chart above clearly shows that the shooting star pattern emerges as soon as the RSI reading is above 70, asserting overbought conditions. The pattern forms at an area of strong resistance indicate that the price is likely to edge lower from the bullish setup.
