Have you ever heard about Shooting Star Candlestick Pattern? What’s the shooting star meaning in trading? What do traders and astronomers have in common? Both study shooting stars.
Now while in astronomy, a shooting star is a term given to a tiny piece of rock/dust that enters our atmosphere from space. However, in trading, it is a type of candlestick pattern that signals a possible downtrend.
Let’s look at the characteristics of a shooting star candlestick. What it tells traders about the trading conditions, how to use it, and its limitations. And last but not least, what makes it different from an inverted hammer candlestick?
What Makes a Shooting Star Candlestick Unique?
Essentially, a shooting star is a candlestick that features a long upper shadow and a small real body that is present in the bottom 40% of the candlestick. In this type of candlestick, the lower shadow will usually be hardly noticeable or even nonexistent in some cases.
Another key identifier is the gap between the high and the opening price. It must be at least twice as large as the real body to qualify for a shooting star candlestick.
Moreover, in a shooting star formation, the opening price, the lowest price of the day, and the closing price are nearly the same.
The Formation of a Shooting Star Candlestick Pattern
A candlestick can only be referred to as a shooting star when it forms during a price advance. This indicates that the trend leading up to this point must have been bullish. It can also materialize after a period of a general increase in prices. Despite the existence of a few candles hinting at bearish activity in the pattern leading up to it.
Many would agree that the shooting star candlestick’s effectiveness is magnified in situations where it occurs after a series of three or more consecutive rising candles with greater highs. This previous bullish pattern is an important indicator of the overbought conditions of the time.
What Can Traders Learn from it?
This type of candlestick is commonly observed when the price of an asset opens at a certain price, increases in value exponentially, and then closes at a price that’s close to the opening price. It can be spotted at the end of an uptrend and predicts a trend reversal that is bearish.
After the price advance, the shooting star forms and increases in value strongly throughout the day – mirroring pressure from buyers. However, as the trading day progresses, the pressure from sellers gains a foothold as their sell orders begin to fill. As a consequence, the price is pushed down to nearly the opening price. This highlights a moment in time where the sellers defeated the buyers by the end of the trading day and may now be in control of the market and hence the prices.
If the security closes at a price that is below half the range of the candlestick – it is a sign of seller dominance in technical analysis.
Using a Shooting Star in Trading
Traders wishing to begin trading with the shooting star candlestick pattern must remember the following three points before starting their journey.
- Order entry: Only enter a shooting star trade once you’ve made sure that the previous trend was a persistent bullish trend.
- Take Profit: You should aim for a return that is tantamount to the size of the shooting star candlestick pattern.
- Stop Loss: It is important to use a stop-loss order when trading.
Let’s take the example of this particular stock to determine how to use a shooting star candlestick pattern in trading. If you observe the chart, it exhibits an accelerating uptrend initially. Up to the point of formation of a shooting star candlestick. The shooting star highlights that during the day, the price opened and climbed up during the day. Which explains the upper shadow. However, before finally coming to a close near the opening price. The next day, we see that the price closed at an even lower value. And the high of the previous day’s candlestick was not surpassed. From that point onwards, we see a downtrend in price.
If trading with shooting stars, a confirmation candle like the one that came the day after the first sighting of the shooting star could be a green light for traders to sell any long positions they might have been in.
The Need for Confirmation and Other Technical Analysis Tools
The chances of winning can be greatly increased by using other forms of technical analysis in addition to the candlestick pattern. Basing your decisions off one candle alone is not wise. It is because the dominance exhibited by sellers during the shooting star period might not have a lasting impact on prices after all. Since prices are always fluctuating.
Instead, it is recommended that traders wait at least a day for the confirmation candle. However, keep in mind that this does not set in stone that prices will fall continually. Furthermore, it grants us little to no information on how steep the drop will be. Because this could only be a brief downswing that gains momentum in the upward direction after a short period of time. Ultimately sustaining the longer-term upward movement in price.
Shooting Stars and Inverted Hammers – What’s the Difference?
An inverted hammer has a long upper shadow with a barely visible lower shadow and a small real body near the bottom of the candle. Don’t see the difference yet? That’s because they look the exact same! Their difference lies only in the context and location of the candlestick.
An inverted hammer will always appear after a trend of persistent bearish activity and signals an uptrend reversal. On the other hand, a shooting star only forms after a period of bullish activity and marks a potential bearish reversal.
In the case of the former, the buyers are putting pressure on the price of the asset to rise, while in the latter, it is the sellers that appear to be in control of the market.
