Are you a short-term trader who loves to take advantage of falling markets? If Yes, then we will tell you about a pattern that can help you in doing so.
Shooting star pattern is a popular technical analysis tool that assists traders in identifying day trading opportunities. Wait, you don’t know about it? Not to worry. Let us quickly understand what a shooting star candlestick is and how to interpret it.
What is a shooting star pattern?
A shooting star is a candlestick pattern that signals a short-term reversal from uptrend to downtrend.
The patterns generally occur when bulls lose control over the market, and bears manage to push the prices, at least for the short term.
Key Features of Shooting Star Candlestick Patterns
Candle: The pattern consists of a single candle at or close to the recent high.
Body: The candlestick has a small body and a long upper tail that doubles the body with no or little lower shadow.
Trend: A shooting star candle appears after a strong bullish trend.
A quick glance
No, a shooting star candle generally appears during an uptrend. However, it signals a bearish reversal.
A shooting star pattern consists of a small single candle with a small body and a long upper tail that is double the body with no or little lower shadow.
A shooting star indicates that bears have managed to push the price at least for a short duration, suggesting a potential for a bearish move.
Yes, a shooting star pattern can be green or red in color. However, it indicates a bearish reversal.
- Watch the next candles. The next few candles should be bearish.
- Check volume. High trading volume confirms the pattern.
- The shooting star candle should appear near the resistance
- Combine shooting star with RSI, Oscillator and moving average indicator.
How to Trade Shooting Star Pattern
Identify the pattern: The first step is to look for a shooting star pattern in a chart. Look for a small body candle with a long upper shadow and no or little lower shadow that appears in an uptrend.
Watch the Next Candles: A shooting star candle should be followed by a strong, bearish candle. The next few bearish candles will confirm that bears are gaining momentum.
Analyze the Volume: High volume during shooting star appearance signals a potential for the start of a downtrend. So check the trading volume.
Confirm with Technical Analysis Indicators: Confirm the shooting star with technical analysis indicators such as moving averages, oscillators, Fibonacci retracement or relative strength index.
Place Trade: Once you have confirmed the pattern, place a trade. The shooting star implies a bearish reversal, so open a sell position. Set proper trade entry, stop loss and take profit level.
Advantages of Shooting Star Candlestick Pattern
Easy to Spot
The pattern involves the formation of only one candle. You need not watch lengthy formations, so it is easy to identify. Also, it appears frequently on the chart.
So in this step learn about technical analysis indicators, charts, candlesticks patterns and trend lines. Also learn to identify support and resistance, price high, lows, and swings.
Early Signal
A shooting star is an early indicator pattern. It means that the pattern provides early alerts for trend reversal. So you have a proper time for confirmation and can make trading decisions effectively.
Every time a liquidity gap or breakout is expected to occur, you can see a particular pattern on charts. So, you just need to learn to identify these visual representations to spot high-volume trade activities.
Versatility
The concept of a shooting star is applicable to diverse markets. You can trade currency pairs, commodities, metal, energy, stock, indices, ETFs and other products.
Multiple Ways for Confirmations:
In the financial market, supply and demand dynamics play a crucial role. When it comes to the forex market, market makers’ moves can significantly swing these dynamics. So traders can take advantage of such moves and stand out from the crowd.
Limitations of Shooting Star Candlestick Pattern
Need for Broader Analysis: Shooting Star is not enough to make a trade decision. You need to consider broader market analysis, including news, economic events and overall technical analysis conditions.
Not a Guarantee of Reversal: Shooting start indicates a bearish reversal. Many traders open sell positions as soon as the pattern appears on the chart.
However, it is not 100% foolproof, and prices might not fall after appearance. And if, during such a scenario, you end up placing a trade, then you may suffer a loss.
Lack of Precision: Shooting stars can tell you which direction to trade. However, the pattern will not tell you specific trade entries, stop loss, and take profit points. For that purpose, you need to use other indicators and tools.
Confusing: The shooting star looks similar to an inverted hammer, doji, or morning star pattern. The little difference between these patterns changes the entire interpretation. If you identify any other pattern as a shooting star, it may lead to wrong trading decisions.
Shooting Star vs Inverted Hammer
Shooting star and inverted hammer look exactly the same with one little body candle, big upper wick, and no or little lower wick. However, the key difference is that a shooting star appears during an uptrend and an inverted hammer during a downtrend.
Shooting Star vs Inverted Hammer
Shooting star and inverted hammer look exactly the same with one little body candle, big upper wick, and no or little lower wick. However, the key difference is that a shooting star appears during an uptrend and an inverted hammer during a downtrend.
Bottom Line
Shooting star patterns can provide valuable insights to short-term traders looking for bearish signals. You can surely consider the pattern when making trade decisions.
However like any other pattern, even shooting star has some limitations. And you can manage these limitations only with the right knowledge of technical analysis. For that purpose, you can join Market Investopedia and get exclusive trading resources.
