Shooting Star Candlestick Pattern: What is it & How to trade it?

First, it has a long upper shadow and a small or no lower shadow. For aggressive traders, the Shooting Star pattern illustrated below could potentially be used as a sell signal. Following the advance, a shooting star opens and then rises strongly during the day. This shows the same buying pressure seen over the last several periods.

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. falling star candlestick Once you’ve established a good resistance level, you can look for bearish candlesticks patterns, like the shooting star, forming at or near the level. More realistically, if you spot a good shooting star candlestick pattern, look to the left to see if it formed at or near a good resistance level.

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In the Shooting Star pattern, the Star takes the form of an inverted umbrella line. An inverted umbrella line is a candlestick that has a short real body that is located at the lower end of the price range, very little or no lower shadow, and a long upper shadow. The upper shadow must be at least twice the length of the candlestick’s real body. The short real body of the umbrella line renders the color of its real body as having no significance. Reversal patterns mark the turning point of an existing trend and are good indicators for taking profit or reversing your position. Generally, trend reversal patterns indicate that a support level in a downtrend or a resistance level in an uptrend will hold and that the pre-existing trend will start to reverse.

• It is considered to be one of the most useful candlestick patterns due to its effectiveness and reliability.
• In the case of the shooting star pattern, you know you’re wrong if price makes a new high.
• For instance, in the vicinity of a shooting star there may be other formations that signal the reversal or indecision.
• For example, if you think that a shooting star at the top of an uptrend means possible reversal, you can test the bearish bias using Fibonacci retracement.
• This creates an excellent setup to short Hewlett Packard right at the beginning of an emerging bearish trend.

This tool is not always a highly accurate pattern in day trading. At times, it is possible for a financial asset to continue rising even after a shooting star pattern forms. However, if you use the strategies mentioned above, you will be at a good position to avoid risking too much money. When it forms, it is usually a sign that the financial asset will start a new bearish trend. However, it is important to be patient and wait for a confirmation before you enter a bearish trade. It is easy to confuse the two candlestick patterns since they are similar in appearance.

What Does the Shooting Star Tell You?

Otherwise, you may end of being stopped out before price actually breaks the high. That’s because taking the entry on the open of the candlestick following the confirmation candlestick is likely to create a poor reward to risk scenario. The solution is to wait for a pullback to the normal entry point (see the image below). Simply attach the Chaikin Money Flow indicator on your favorite time frame. This is the only additional technical tool we’re going to use to confirm the validity of the bearish shooting star pattern. The kinds of trade setup we’re going to propose through this reversal trading strategy have an astonishingly high rate of success.

• When they appear in a clearly define trend, these candlesticks indicate a weakening of the trend and a possible reversal of that trend.
• It is not enough to say that a correction is coming, but if it closes below today’s closing level tomorrow, it is very likely that it will drop quickly.
• From beginners to experts, all traders need to know a wide range of technical terms.
• Once you are able to identify the shooting star, you should look to open a short position on a break of the low of the candle.
• Again, this will ensure that you get an accurate entry and prevent you from being stuck at your computer, waiting for a pullback.
• Second, I plan to eventually update my entire free price action course.

Lawrence has served as an expert witness in a number of high profile trials in US Federal and international courts. If you are interested in trading using technical analysis, have a look at our reviews of our recommended brokers to learn which tools they offer. It’s important to backtest and demo trade any new trading techniques that you want to add to your live trading toolbox. If you don’t thoroughly test new techniques, you won’t have the confidence to stick with them when you experience losing streaks. If you use the free MetaTrader 4 platform, you can use this break even EA to automatically move your stop loss to break even.

What is the Shooting Star candlestick pattern?

The Shooting Star is a bearish reversal signal, which means it indicates that the price has reached the top of its current uptrend and will fall soon. To that end, we’ve put together a handful of reference guides for the best bullish and bearish candlestick patterns to help guide you along the way. It is worth noting that a shooting star pattern is not always a sign that a financial asset will reverse and start a new bearish trend. As a trader, you can observe the market through simple patterns such as price bars, trend lines, or breakouts. On the other hand, you can go for a detailed combination of channels, volatility, and candlesticks. A shooting star is a single-candle bearish pattern that generates a signal of an impending reversal.

Now we have a reason to believe that the price action could be reversed. We wait to see if the next candle is going to confirm the authenticity of the shooting star reversal pattern. In such cases, the shooting star candle is likely to have an even bigger upper candlewick. This implies that the price is about to reverse with even bigger strength. When it happens, it tells you that the currency pair or asset may soon turn around in a bearish manner.

Benefits and Drawbacks of the shooting star candlestick pattern

In other words, there shouldn’t be any other competing higher highs close by in recent history. A good rule of thumb is to place your stop loss 5 pips above the high of your signal (see the image below). This leaves you enough room to account for the spread plus a few extra pips in case the spread spikes slightly.

It can be recognized from its appearance, i.e., a long lower shadow and tight open, close, and low prices. The difference is that the inverted hammer candlestick will have a bear run before the candle we are looking at. If the upper shadow is large and the open, close, and low prices are almost the same, we can see the formation often interpreted by traders as a sign of a bearish move. The shooting star pattern is a great tool for new/beginner technical traders due to its simplicity.

Based on the observation that prices were earlier rejected at the shooting star’s high, it will be practical to place a stop loss order at the last swing high (the red horizontal line). As a trader, it is fairly easy to determine your next move by using this pattern. With reference to the chart above, the expected effect is lower prices. To demonstrate this, let us move  your attention to a chart below. In the middle part of the chart, the price action starts to move gradually higher.

Trade up today – join thousands of traders who choose a mobile-first broker. If you use a stop limit order, you don’t even need to wait at your computer for a pullback. But it’s still a good pattern to trade due to all the other features. This way, we will be protected if the price creates an unexpected bullish move caused by high volatility.

When you spot it, you could place a buy-stop above the upper shadow. In this case, a buy trade will be implemented if the price moves above the upper shadow. In a shooting star pattern, the long upper shadow is usually a sign of people who bought early and are now in a loss-making position since the price slipped back to the opening. However, other indicators should be used in conjunction with the Shooting Star candlestick pattern to determine potential sell signals. If the price rises after a shooting star, the price range of the shooting star may still act as resistance. For example, the price may consolidate in the area of the shooting star.

After that, the downward activity resumes, and after 18 periods, we short HPQ. The price action closes a candlestick below the minimum target of the star pattern. After the pattern confirmation, we sell the security by placing a stop loss order above the upper wick of the star candle to secure our short trade. Its appearance on the technical charts signifies that a security’s price has reached a high, and a reversal is around the corner.