This pattern alerts traders to tighten stop losses or prepare for a potential change in their trading strategy. For example, with the shooting star candlestick pattern, you can enter a trade at the swing high preceding the breakout of the neckline. Once a shooting star pattern is identified, traders should consider it as a potential signal for a trend reversal. However, it is crucial to wait for confirmation before taking any action. Confirmation can be obtained by observing the next candlestick after the shooting star formation. If the following candlestick confirms the reversal by closing below the shooting star’s body, it strengthens the validity of the pattern.
Rules for trading the shooting star strategy
Selling must occur after the shooting star, although even with confirmation there is no guarantee the price will continue to fall, or how far. After a brief decline, the price could keep advancing in alignment with the longer-term uptrend. The long upper shadow represents the buyers who bought during the day but are now in a losing position because the price dropped back to the open. Following the advance, a shooting star opens and then rises strongly during the day. As the day progresses, though, the sellers step in and push the price back down to near the open, erasing the gains for the day. This shows that buyers lost control by the close of the day, and the sellers may be taking over.
Shooting Star Trading Strategy
Firstly, we want to confirm that an uptrend exists prior to the shooting star formation. This is an important requirement because we know that a valid shooting star pattern should occur in a rising market. As with any technical analysis tool, it is essential to remember that the shooting star pattern is not infallible. Traders should always consider other factors, such as fundamental analysis or market sentiment, before making any trading decisions. Additionally, traders can incorporate other technical indicators, such as moving averages or oscillators, to confirm the shooting star pattern. If these indicators align with the shooting star’s bearish signal, it further strengthens the validity of the pattern.
Waiting for confirmation/false signal
First, buyers are enjoying their gains as the stock shoots to a climactic high. As this euphoric moment begins to set in, short traders begin to sell the stock on a flurry of buy orders. Since the moving average is below the entry point, we’ll use that as a profit target.
You might be shocked that you’ll lose money if you trade this pattern using traditional candlestick charting methods. Alternatively, you could place a stop-loss slightly above the upper shadow especially when you are shorting the financial asset. For example, if you short an asset, you could place a stop-loss above the upper shadow. A shooting star tells you that a financial asset jumped sharply when the market or the candle opened. It then stabilized close to the upper side of the candle and then moved to the next candle.
The long wick should take up at least half of the total length of the shooting star candle – see image below. Japanese candlesticks are a popular charting technique used by many traders, and the shooting star candle is no exception. This article will cover the shooting star reversal pattern in depth and how to use it to trade forex.
- The shooting star candlestick is comprised of a small body, indicating a minimal difference between the opening and closing prices.
- It simply needs to show that there was selling pressure coming at the highs or lows of the reversal.
- The first thing is how to identify the pattern, and the other is how to trade it.
- The best way to ascertain what works is with backtesting, where you use historical data to gauge the effectiveness of different filters.
- The frequency and performance of this pattern make it one of the best crypto candlestick patterns.
This event would serve as our confirmation for the shooting star pullback set up. So now we have protected the position in case the trade begins to move against us. Fortunately for us, the price action started to move lower precipitously following the breakout signal. Our exit plan calls for monitoring the price action closely and waiting for a candle close above the nine period simple moving average line.
If we analyze our shooting star formation here, we can see that all of these important guidelines have been met. As such, we can confidently label this candlestick as a shooting star pattern. It’s important to note that there is nothing magical about the nine period simple moving average line. You could just as well use a slightly shorter or longer variation as well.
You can draw horizontal lines to identify the borders of the range or you can use the Bollinger Bands, which can give a rough estimate of the boundaries of the range. By the end of this article, you’ll have a firm grasp on what shooting stars are, what they tell us about supply and demand in a stock, and how to profitably trade them. Let’s start decoding these mysterious candlestick clues to make smarter moves in the market. After an uptrend, the Shooting Star pattern can signal to traders that the uptrend might be over and that long positions could potentially be reduced or completely exited.
The Shooting Star candle pattern reveals a potential bearish reversal in the market. This pattern, especially when occurring in an uptrend, suggests that the buyers are losing control to the sellers. It’s a sign of market exhaustion from the buyers’ side, indicating that an uptrend may be nearing its end. However, traders should seek confirmation from subsequent candles or other technical indicators before making a decision. In my experience, premature reactions to a single pattern without confirmation often lead to misjudgments. It appears after an uptrend and indicates that the market could be topping out.
This requires effort and thus many skip it in the dream of making quick and easy money. Before you use the strategy, make sure you backtest it to know if it can make money. It makes no sense to put your hard-earned money on a strategy that does not have positive expectancy. Thus, the charting method was in use in Japan for hundreds of years before becoming popularized in the Western world.
A candlestick pattern may take on more significance if it occurs near a level that has been deemed important by other forms of technical analysis. First and foremost, we will need to spot a potential shooting star formation on the price chart. Referring to the upper magnified area on this price chart, we can clearly see the forex shooting star candle formation.
It’s crucial to assess the pattern within the broader market framework, considering factors such as volume, historical price levels, and market trends. Understanding and applying these nuances can be the difference between a good and a great trading decision. shooting star candlestick pattern A green Shooting Star Candlestick, while less common, still carries significance. Occurring in an uptrend, it indicates that despite the closing price being higher than the opening, sellers were able to push the price down from its highs significantly.
After spotting such a pattern, the right thing to do is wait for a confirmation that a trend reversal is indeed happening. Finally, it is recommended that you do a multi timeframe analysis to identify key support and resistance levels for your trades. Second, as mentioned above, this pattern is characterized by having a small body and a long upper shadow. As you can see in the example above, the MACD crossover did not happen in the exact price level of the shooting star candlestick. Instead, the crossover was confirmed a few candles later, which eventually signaled a trend reversal.
The pattern is characterized by a small body at the lower end of the trading range, with a long upper shadow. This suggests that sellers are starting to outweigh buyers, potentially leading to a downward shift in market control. The Bearish Shooting Star warns of a potential end to bullish momentum, urging traders to consider securing profits or establishing short positions. While typically a reversal pattern, shooting stars can form within downtrends as continuation signals.
It has all of the characteristics that we like to see within the structure. Here, we will be looking for a valid shooting star pattern that occurs in the context of a downtrend. The shooting star pattern must still occur after a price move higher, however in this case, that price rise should be a correction to the larger downtrend. Once we have identified these conditions, then we will prepare for a short trade.
In the market, there are many seasonal tendencies that can be quantified and used in a trading strategy. One way of gauging the volatility of the market is to watch the ranges of the candles. If you see a lot of long wicks and tall candle bodies then the market naturally is quite volatile.
Initially, a shooting star opens strong, reflecting the buying pressure seen in recent sessions. However, by the session’s close, sellers drive the price back near the open, signaling a loss of buyer control and seller dominance. Another way to trade with the shooting star pattern is to short the upper border of a ranging market.
The Bullish Shooting Star, often confused with the Inverted Hammer, is less common. This pattern is characterized by a small body with a long upper shadow, similar to its bearish counterpart, but it signals an unsuccessful attempt by bears to drive prices lower. The presence of a Bullish Shooting Star may indicate that sellers are losing steam and a bullish reversal could be imminent, offering a potential entry point for buyers. The Shooting Star candlestick pattern is a compelling tool in the toolbox of technical analysis, offering crucial insights into market trends.
As you see, the shooting star candle pattern gives us an indication that the trend might reverse. This creates a nice premise to short HP right in the beginning of an emerging bearish trend. Despite the small correction on the way down, the shooting star reaches the target of three times the size of the candlestick.
One common indicator used alongside the shooting star is the Relative Strength Index (RSI). The Shooting Star tells traders that the current uptrend may be weakening and a downtrend could be on the horizon. It’s a visual representation of a shift in market sentiment – from bullish to bearish. This pattern becomes more significant if it appears at a resistance level or after a prolonged price advance. Confirming it with other technical indicators can enhance its reliability.
Even so if you entered at the top of the confirmation candle and exited at the first solid confirmation of the trend reversal, you’d still make a sizable profit. Moreover, in choppy or range-bound markets, the value of shooting star patterns may be diminished, making them harder to interpret accurately. Shooting stars indicate a possible shift to lower prices, especially effective after 2-3 consecutive rising candles with higher highs.
In other words, we exit the trade when the market crosses below the 20-period moving average. The shooting star pattern should occur at the top of the trend, where the market is much more likely to revert. In this last part of the article, we wanted to share a couple of trading strategies that use the shooting star pattern. While this indeed sounds great, it’s hard, if not impossible, to tell what happened in the market at any given time. As such, the following discussion should be seen merely as an example of what the market might have been up to when forming the shooting star pattern. The Shooting Star pattern reveals a significant price advance within a trading session, followed by selling pressure that brings the price back down near its open.
Probably, the Gravestone Doji resembles the shooting star candlestick Forex the most – the only difference is that the opening price and closing price are equal to the Gravestone Doji. The Shooting Star candlestick formation is viewed as a bearish reversal candlestick pattern that typically occurs at the top of uptrends. If price breaks out below the low of the shooting Star formation, it will often lead to further downside momentum. In this case, a buy trade will be implemented if the price moves above the upper shadow.
If you look closely at the price chart above, we can see that the major trend of this market leading up to the shooting star formation is bearish. At some point, the sharp bearish price move began to subside, as the price action started to move higher. This upward price move is considered as a correction or pullback trading opportunity. The shooting star chart pattern that emerges at the termination of the upside correction has been magnified for easier viewing. On the price chart above you can see that the price action was moving higher.
If the RSI is high, then the market is overbought, and more likely to turn around soon. The general interpretation is that a market is overbought if the RSI indicator is above 30. The reason behind this is that mean-reverting markets like equities are more likely to revert the more extreme movements they’ve produced. When the market opens the next day, things seem to continue in the way most people had anticipated.
If you look closely at the shooting star formation once again, you will notice that the upper wick did in fact penetrate the upper line of the bearish channel plotted. We will plot a bearish channel by connecting the most prominent swing highs within the downtrend, and then run a parallel of that line off of the lower swing points. You can see the created bearish channel that is plotted with the two downward pointing trendlines. The light blue line shown on the price chart is our nine period moving average line that serves as the exit signal.
Steve Nison found that there are certain patterns in the chart that Japanese traders use to identify trading opportunities. The candlestick chart was believed to have originated from Japanese rice merchants and traders who invented it to track market prices and daily momentum. The origin can be traced to a rice trader in Japan named Homma Munehisa in the 18th century AD. The pattern is formed when the price trades higher during a trading session and later declines to close around the opening price of the session. This creates a long upper wick, a small body, and little or no lower wick.
Unlike most other websites, we’ll go on to backtest the performance of the shooting star with strict trading rules (at the end of the article). Now, the shooting star looks similar to the inverted hammer and hanging man patterns you may see. The shooting star is sometimes referred to as the “shooting star Japanese candlestick” pattern.
The first candle must open below the previous candle’s close; this isn’t a requirement in the shooting star. A shooting star candlestick is a unique charting pattern that comes at the end of an uptrend and indicates a potential trend top area followed by a trend reversal. This bearish reversal candlestick has a long upper shadow, little (or no) lower shadow, and a small body. Utilizing the Shooting Star pattern effectively in trading requires understanding its implications and acting accordingly.