Contents
The shooting star reversal candlestick boasts a success rate of about 69% when predicting bearish reversals from an uptrend. However, the low success rate indicates it cannot be relied on its own to provide accurate reversal signals. It is a bearish candlestick pattern characterized by a long upper shadow and a small real body. The pattern forms when a security price opens, advances significantly, but then retreats during the period only to close near the open again. Consequently, the open and close price points are close to one another. The long upper shadow is usually twice the length of the candlestick’s real body.
He is the most followed trader in Singapore with more than 100,000 traders reading his blog every month… No matter how good it is, you’ll still encounter losing trades — it’s a fact of trading. But remember, the Shooting Star is only one variation of bearish price rejection.
Commodity.com is not liable for any damages arising out of the use of its contents. When evaluating online brokers, always consult the broker’s website. Commodity.com makes no warranty that its content will be accurate, timely, useful, or reliable.
The shadow should be greater than 70% of the total body of the candlestick. It is important to acknowledge that one candle is often not meaningful enough to estimate the chances of a potential reversal. First and foremost, the timeframe is a very important factor for the significance of candlestick analysis. The higher the timeframe, the more significant is the candlestick pattern. For example, a shooting star in the weekly chart is more bearish than a shooting star in the 4-hour chart. As we have seen, the shooting star pattern is an important candlestick formation that can help us pinpoint the end of a major uptrend or a minor pullback within a downtrend.
In both cases, an occurrence of the shooting star at the top of an uptrend only generates a signal of an impending reversal and it shouldn’t be taken as a direct trading signal. A shooting star pattern is found at the top of an uptrend, when the trend is losing its momentum. In the CSCO chart above, the market began the day testing to find where supply would enter the market.
You can see when the exit signal was triggered on this trade by referring to the magnified area at the lower right of the price chart. The entry signal from this pattern set up would occur immediately following the close of the shooting star candle. That is to say immediately following the shooting star formation, we will place a market order to sell. The stop loss placement would be just above the high of the shooting star candle itself. Since the high of the shooting star candle serves as a potential level of resistance, this would serve as a logical level at which we would want to exit our trade with a small loss.
Relative Strength Index (RSI) and Shooting Star Candlestick Pattern
This is evident from the closing price within the shooting star, which occurs within the lower one third of the price range. So essentially, we consider a shooting star pattern to be an upside rejection pattern. The implication of which is that the supply in the market is higher than the demand, thus, a continued price decline should ensue. Analyzing the structure of the trend leading up to the shooting star candlestick is pivotal to your success in trading this pattern. The ideal scenario when trading shooting star patterns is that the breakout will occur on low or average volume. It’s simple for computers to identify these patterns but, you’ll notice there are no HFT funds making billions just trading candlestick patterns all day.
The upper tail, also known as a “shadow,” which is the line that forms above the body of the candlestick, is at least two to three times longer than the candlestick body. Before you start risking your own capital, you may want to consider opening a demo trading account. This way, you will practice with virtual funds and equip yourself with an array of trading patterns and formations to apply when you start trading live.
Performance of the Shooting Star Pattern
These patterns allow you to enter early in the establishment of the new trend and usually result in very profitable trades. The shooting star formation is a unique bearish candlestick pattern that comes at the end of an uptrend and signals an overbought market. In approximately the center of the chart, you can see a strong, sustained up move in GBP/USD. Several candlesticks show the currency pair moving sharply higher, but then a candlestick forms a shooting star pattern. There is a long upper tail or upper shadow, a comparatively much shorter lower tail or shadow, and a noticeably short body with the price closing below the candle’s opening price. As outlined earlier, a shooting star is a bearish reversal pattern which signals potential change in the price direction.
- Again similar to a hammer, the shadow, or wick, should be twice as long as the body itself.
- One needs to use fundamental and/or technical analysis to confirm the pattern’s predictions.
- However, it is important to be patient and wait for a confirmation before you enter a bearish trade.
- The daily timeframe chart offers the best combination of reliability and frequency as it relates to the shooting star candlestick formation.
- It is common for the market to reverse as soon as prices are deemed overbought, as very few buyers are willing to buy at this level.
- The upper wick takes at least half of the length of the candlestick for a shooting star and appears at the top of an uptrend.
An inverted hammer occurs after a price decline and marks a potential turning point higher. The colour of the shooting star candlestick does not matter, either red or green. The only thing that matters Best Investment Options 2021 is the candlestick’s location, prior trend, and structure. In this post, you’ll learn about the shooting star candlestick pattern’s structure, significance, trading psychology, and trading guide.
Guide To Understanding Shooting Star Candlestick Patterns – Commodity.com
The shooting star candle stick pattern is a beneficial technical analysis tool to notice a bearish divergence in the market. The shooting star indicator may be useful for traders gone short on a market looking for an exit, or traders looking for an entry point to go long. They both have long upper shadows and small real bodies near the low of the candle, with little or no lower shadow. A shooting star occurs after a price advance and marks a potential turning point lower.
The actual sell signal will be triggered upon a candle close below this upsloping trendline, assuming that the other conditions have been met. As long as we can see that the price action is moving higher, with successively higher highs and higher lows, then we can be confident that an uptrend is in place. Once this condition has been confirmed, along with all the requirements for a valid shooting star pattern, then we will prepare for a potential short trade. It’s important to note that the most reliable shooting star patterns are the ones that occur on the higher timeframe price charts.
If traded incorrectly, you can end up on the wrong side of a breakout. When we allow ourselves to “just focus on finding the pattern,” it becomes much easier to focus and perform individual analysis on that pattern. All of the sometimes contradictory information and advice sometimes just serves to confuse. As a rule of thumb, when there’s a time frame divergence, the higher time frame is more predictive. Low volume on a breakout significantly reduces the odds of that breakout’s success. Keep in mind that, depending on the risk/reward profile you choose, your trade selection should also change.
However, bears are able to counter the bulls and push prices roughly to where prices started for the day. Still, with a quick look at a trading chart, you’ll be able to understand what the shooting star candlestick pattern looks like. As you can see, in the GBP/USD 30-min chart below, the how to conduct a market analysis for your small business appears after an uptrend and indicates a price reversal of the current trend. Additionally, there are some characteristics of a shooting star formation that, if they occur, make the signal of a possible market reversal to the downside stronger. The pattern is also considered stronger if there is no lower tail or shadow whatsoever. Confluence describes the event of multiple indicators pointing in the same direction.
Our advice is to consult other indicators, like Fibonacci, trend lines, or moving averages, and decide whether to exit a positive trade or not. The shooting star is actually the hammer candle turned upside down, very much like the inverted hammer pattern. The wick extends higher, instead of lower, while the open, low, and close are all near the same level in the bottom part of the candle.
What Is A Shooting Star Candlestick Pattern?
The appearance of the shooting star candlestick signifies price has topped and is likely to correct and start moving lower. This means that when you add the MACD indicator to a trading chart, you’ll be looking for a crossover around the same price area where the shooting star candlestick pattern occurs. Taking the above chart into account, there are several steps you need to follow in order to effectively identify and trade the shooting star candlestick pattern. As with any other technical analysis candlestick pattern, you must know how to correctly identify the shooting star pattern in order to use it as part of your forex trading strategy. The shooting star pattern is just one of many signals of potential market reversals recognized in candlestick charting. Other reversal patterns include engulfing candles, the hanging man pattern, and doji candlestick formations.
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. The shooting star pattern can occur during periods when bulls appear to be in total control, with prices likely to continue edging higher.
Is There A Bullish Shooting Star Pattern?
If trading this pattern, the trader could sell any long positions they were in once the confirmation candle was in place. The light blue line shown on the price chart is our nine period moving average line that serves as the exit signal. After a sharp drop from the shooting star candle, the price started to print a few consecutive green bars. This upper price momentum continued until one of those bars finally closed above the nine period SMA line. That event served as the exit signal, which would have closed out this trade with a profit. On the price chart above you can see that the price action was moving higher.
What follows is the fresh high in the context of a long bullish candle. If you look at this candle only, the situation looks very positive for the bulls, as there is an uptrend in action popular forex chart patterns and the new high has just been posted. However, caution would have to be used because the close of the Shooting Star rested right at the uptrend support line for Cisco Systems.
Notice how the price moves higher in a nice stairstep fashion with successively higher highs and higher lows during its progression. With the uptrend confirmed, we can ad hoc analysis definition now draw a trendline connecting the swing lows within the upward moving price action. You can see the upward sloping blue line that we have drawn as our trendline.
Thus, the third candlestick in the formation must confirm the pattern and must be a black candlestick that closes well into the body of the first candlestick. 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 preexisting trend will start to reverse.
Once we have identified these conditions, then we will prepare for a short trade. Now that we have recognized a shooting star formation on the price chart, we need to confirm whether or not it occurs in the context of a rising market. Obviously, we can see that the price action preceding the shooting star was clearly bullish. There are dozens of different candlestick patterns that are available to market traders.