Shooting Star Candlestick Pattern: Meaning and Interpretation
Candlestick charts are viewed as an indispensable component of technical based price action trading. A Shooting star candlestick pattern forms when the closing price of a stock is lower than its opening price.
What Is a Shooting Star Candlestick?
It forms when there is an imminent bearish reversal towards the downside. This indicates that the price is going to fall in the near future. The stock opens at a price and from there, it continuously rises during the day.
However, sellers or bears take control and towards the end of the day, the price slides close to the opening level. The candles would be red or black which gives credence to their bearish nature.
One of the most accurate formations of a shooting star pattern occurs when it forms after three or more successive rising candles forming greater highs. Now that you are well aware of the meaning of this pattern, let’s delve deeper into its other aspects.
How to Interpret Shooting Star Candlestick?
One of the biggest implications of the formation of the shooting star candlestick pattern is that security has reached its zenith, and is about to fall. It forms during an atmosphere of rising prices and a few bearish candlesticks.
After the advancement, this candlestick moves higher as the day progresses. It is representative of the fact that the security is experiencing high buying pressure. As the session moves ahead, sellers or bears come in firmly and try to take control of the market.
This leads to a rapid decline in the price of respective security. Therefore, all gains accumulated during the session get eroded by the end of the day.
A long upper shadow that forms in this candlestick exhibits the position of buyers who have purchased heavily after the opening when stock was rallying. However, due to the falling price, they reach a losing position. It is important that you also keep an eye on the immediate succeeding candle after the shooting star as it will serve as a confirmation.
An ideal or perfect formation will only occur when an immediate successive candlestick will be opening at or near the last day’s closing and falls further in heavy volume.
How to Identify a Shooting Star Candlestick?
This candlestick pattern has a relatively small real body. It also has a very long wick at the top and no wick at the bottom. It generally forms after an uptrend or advancement in the security’s price and there is an impending danger of an imminent fall in its price.
Some green candles may resemble a shooting star pattern. This indicates that the closing price was higher than opening price. Many may get deceived and fall for it, but in reality, these candlesticks are variants of an inverted hammer candlestick pattern which is also a popular bear reversal cue.
The basic structure of a shooting star candlestick remains the same – a small real body with a long upper wick and no lower wick. The upper wick is double the size of its real body. All these serve as visual indicators and help you in identifying this pattern.
How to Trade Using a Shooting Star Candlestick?
You can trade this candlestick pattern by looking at the following parameters:
- Entry point
Before making an entry in a trade influenced by a shooting star pattern, you should be having a confirmation that the previous trend was bullish with signs of accumulating bearish pressure. Only after getting the confirmation, you can decide on the entry point of your trade.
- Stop loss
The next thing is to determine your stop loss . You cannot enter any trade without making an exit plan, as it may lead to unlimited losses. It is important that you consider your risk appetite and determine an appropriate stop-loss based on them.
The price at which you are targeting to exit a trade and book profits should be equivalent to the size of this pattern and its progression. If the security reaches your expected price level, you can make a successful exit from the same and thereby book profits.
What Are the Limitations of Shooting Star Patterns?
This candlestick pattern can prove to be hugely beneficial for traders as it predicts arrival of an imminent downtrend. But it also has some limitations.
There is always a possibility that this indicator may give out false alarms or signals. Hence, for the initiation of a successful trade, it is necessary that you also check on other indicators and get confirmation about the same. Moreover, relying on this candlestick pattern without any stop loss may open the gates for unlimited losses.
Shooting star candlestick is one of the most popular indicators that gives an idea regarding bearish trend reversal. It occurs at the end of a prevailing uptrend and signals an impending downfall in the price of a security. If you are looking to trade with this pattern, it is important that you consider other indicators as well for confirmation.
Frequently Asked Questions
What is the difference between an inverted hammer and shooting star candlestick?
The only difference between them is that a hammer candlestick forms after security has experienced a fall in its price and a bullish reversal is impending.. On the other hand, shooting star patterns form after advancement in security price and there’s an imminent downfall on the cards.
What are the benefits of using shooting star candlestick?
There are various advantages to this pattern. It has distinct and clear features, which makes it easy to understand. Moreover, you can take this as a confirmation of decline in the security’s price against the resistance level.
How reliable are shooting star patterns?
Due to its accuracy and effectiveness in analysing future market trends, shooting star patterns are quite reliable. However, it is always advisable to look for other confirmatory signals before taking any trading decision.
What happens after shooting star candlestick pattern?
If the successive candlestick is red, it acts as a confirmation of bearish reversal. You should always try to put stop-loss targets above or higher than the candle’s high. This will make corresponding trade more meaningful.