Candlestick patterns offer a good deal of insight to traders on how market prices may potentially behave. These patterns are often used to gauge entry and exit point signals while trading. Most traders use Japanese candlesticks, including the shooting star pattern, which is a popular charting technique. Here, we will discuss the shooting star pattern in detail while understanding how to identify it, its advantages, and how to use it while trading.
What is a shooting star candlestick pattern?
A shooting star candlestick pattern:
- Is a chart formation
- Observed when a stock’s market price rises significantly, however, it is rejected to be closed somewhat near the opening price level
- Comes in a small body with a long upper wick and a small lower wick
Characteristics of a shooting star pattern:
Some of the features to look out for in a candlestick pattern to be called a shooting star:
- At least half of the candlestick length is taken up by the upper wick.
- It usually appears at the top of an uptrend.
- Is a possible signal of bearish reversal.
- It indicates that an uptrend may not sustain and prices may fall.
Traders may confuse the shooting star pattern with the inverted hammer candlestick. This is because both patterns have a longer upper wick and a small body. It is important to note, however, that an inverted hammer is observed at the bottom of a downtrend and is a signal of bullish reversal and not a bearish reversal.
How to identify the shooting star pattern?
Just like any candlestick pattern, a shooting star, if identified correctly, can be of immense use to traders. Here’s how to go about identifying this pattern:
- The upper tail is also called shadow. It is the line that appears above the candlestick’s body.
- The upper tail is at least twice or thrice the size of the candlestick body.
- The lower tail is the line extending below the candlestick body. It is either non-existent or is too short.
- It is generally no longer than the candlestick body.
The candlestick body is an indicator of the stock’s opening and closing prices. It is very short in the shooting star pattern, indicating that the opening and closing prices are very close to each other.
What are the benefits and limitations of the shooting star pattern?
Here are some of the main advantages of using a shooting star candlestick pattern in trading charts:
Easy to spot
The shooting star pattern can benefit both new or beginner-level technical traders and seasoned traders, since it is simple to understand. It is very straightforward to spot a potential shooting star candlestick as long as traders follow the pattern description.
Confirmation on bearish trend
As the shooting star pattern comes close to a resistance level or a trend line, it can confirm the onset of a new bearish bias. It can act as a reasonably reliable pattern to identify a bearish reversal when it appears close to a resistance level.
Some of the limitations to keep in mind about shooting star pattern are:
- It is not advisable to make trading decisions based on shooting star patterns alone. It requires confirmation using the next day candle or one can make use of other technical analysis indicators alongside.
- It requires use of stop losses to ensure that possible losses are contained.
How to trade using a shooting star candlestick pattern?
The shooting star candlestick pattern is very easy to identify and is an effective strategy to adopt for trading in the financial markets. Using this, one can trade in stocks, currencies, futures, and other financial instruments. Any trader or investor must follow certain steps while taking trade decisions based on the shooting star candlestick pattern.
While trading with the help of the shooting star pattern, one should note the below-mentioned points:
- Entry: Before entering a trade using the shooting star pattern, a trader must check whether the prior price trend has been active bullish.
- Stop loss: It is advisable to use a stop-loss order while trading through the shooting star candle pattern.
- Booking profits: A trader should aim for a price target that is the same as the size of the shooting star pattern.
Whenever a trader uses a shooting star pattern, it is important to consider having risk management strategies in place. This allows the trader to have a ‘safety-net’ in case the market does not move in a favorable direction. Shooting star candlestick is best viewed in conjunction with other metrics instead of considering it in isolation. Before acting on the pattern formation, a trader must confirm the signal by verifying other technical indicators.
The candlestick patterns that indicate bullish trends include Hammer, Inverse hammer, Bullish engulfing, Piercing line, morning star, and three white soldiers.
Technical analysis involves using statistics to analyze the performance of a stock. This can be done using the historical stock performance as per the price movements and changes in trading volumes.
Wick is also called candlestick shadows. It is a thin line coming up from the candlestick’s body. It represents the highest and the lowest stock price within a given period. How long or short a wick is indicates the range of stock price movements.
A bearish reversal is seen when an upward trend in stock prices comes to an end and begins to move in the opposite direction.
While trading, many people make the mistake of looking at candlestick patterns in isolation. It is important to consider other indicators along with candlestick patterns to get a holistic perspective.