Shooting Star Candlestick Pattern
When you hear the term "Shooting Star," what is the first thing that springs to mind?
Isn't a star approaching the earth's surface?
But what does this have to do with Technical Analysis?
A shooting star, on the other hand, is a bearish candlestick pattern with a long upper shadow and no bottom shadow.
What is Shooting Star Candlestick Pattern?
A bearish candlestick with a long upper shadow, little or no lower shadow, and a little true body at the period's low is known as a shooting star pattern. It appears after a period of upward movement. A shooting star candlestick pattern, to put it another way, is a type of candlestick that occurs when a security opens, advances significantly, and then finishes the day near the open.
A shooting star candlestick pattern must appear during a price gain to be labeled a shooting star. Furthermore, the distance between the day/period's highest price and the opening price must be more than twice the size of the shooting star's body. Below the genuine body, there should be little to no shadow.
Notes:
After an advance, a shooting star pattern appears, indicating that the price may begin to plummet.
The formation is bearish since the price attempted a substantial climb during the day, but sellers took control and pulled the price back down toward the open.
After a shooting star, traders usually wait to observe what the next candle (period) does. They may sell or short if the price falls during the next term.
If the price rises following a shooting star, the formation could have been a false indication, or the candle could be indicating a potential resistance area in the candle's price range.
Psychology behind shooting star candlestick pattern
Shooting stars candlestick pattern imply a price top and reversal could be approaching. After a period of three or more consecutive rising candles with higher highs, the shooting star candle is most useful. Even if a few recent candles were bearish, it could occur within a period of generally rising prices.
A shooting star pattern appears after the advance and rises dramatically during the time period. This reflects the same level of buying pressure as in previous periods. However, as the time proceeds, sellers enter the market and drive the price back down to near the open, wiping out the period's gains. This indicates that towards the end of the period, buyers had lost control and sellers were gaining control.
The buyers who bought during the period but are now in a losing position since the price has dropped back to the open are represented by the extended upper shadow.
The shooting star candle is confirmed by the candle that forms following the shooting star. The next candle's high must remain below the shooting star's high, and it must then close below the shooting star's close. The candle that follows the shooting star should ideally gap lower or open around the previous close and then go lower on significant volume. After a shooting star, a down day confirms the price reversal and suggests the price may continue to decrease. Traders may decide to sell or sell short.
If the price rises following a shooting star, the shooting star's price range may still operate as resistance. For instance, the price may settle around the vicinity of the shooting star. The uptrend will remain intact if the price continues to rise, and traders should favor long positions overselling or shorting.
What is the best way to trade the shooting star candlestick pattern?
Key Takeaways:
Before trading with the shooting star, keep the following considerations in mind:
Trade Entry: Confirm that the prior trend is an active bullish trend before entering a shooting star trade.
Stop Loss: When trading the shooting star candlestick pattern, you should always strive to place a stop-loss order.
Profit: For this trade, the price goal should be equivalent to the size of the shooting star pattern.
1. Entry in the Trade
Before you enter a shooting star deal, double-check the pattern.
Here are a few success characteristics to consider:
Recognize a current bullish trend.
Look for a candle with a tiny body and a large candlewick on top.
Wait for a bearish candle to breach the shooting star body's bottom point.
This will verify the accuracy of your shooting star's position on the chart.
You should short the security if you are able to detect the presence of these signals. After all, you're expecting a bearish price move in the near future.
2. Stop Loss
When trading the shooting star candlestick pattern, you should always employ a stop-loss order. After all, nothing in stock trading is certain, and you could get misleading indications when trading the shooting star pattern.
As a result, arrange the shooting star candlestick pattern over the pattern's upper wick.
3. Profiteering
The shooting star's pricing objective is the same as the pattern's size (the length of the candle).
Similarly, we're looking for a three times the length of the shooting star price move, including the wick.
Benefits of Shooting Star Pattern
Because of its simplicity, a shooting star candlestick pattern is an excellent tool for new technical traders. If traders follow the pattern description as outlined above, spotting a probable shooting star candle is simple.
The candle pattern will occasionally be flawed on its own. The shooting star, on the other hand, can give confirmation to the new negative bias if it appears near a resistance level or trend line. This is due to the fact that a single candle does not play a significant role in the broader trend or market movement.
When adopting this candlestick pattern, it's critical to think about risk management. This provides a ‘safety net' for the trader in the event of a market downturn.
Limitation of shooting star candlestick pattern
In a large uptrend, one candle isn't all that significant. Because prices are always fluctuating, the sellers seizing power for a portion of one period—as in a shooting star—might not be significant at all.
This is why verification is necessary. After the shooting star, selling must take place, albeit there is no certainty that the price will continue to decrease, or how far. Following a small fall, the price may continue to rise in line with the longer-term uptrend.
When employing candlesticks, use stop losses to limit your risk if they don't work out. Also, explore combining candlesticks with other types of analysis. When a candlestick pattern appears near a level that has been deemed significant by other forms of technical analysis, it may take on greater significance.