What is a Shooting Star?
- A shooting star candlestick pattern is found at the top of an uptrend. The shooting star is a bearish candlestick with a long upper shadow. The shooting star is actually a hammer candle turned upside down. The wick extends higher instead of lower while the open, low and close are all near the same level.
- A candlestick is considered as a shooting star when the formation appears during the price advance. The distance between the highest price of the day and the opening price must be more than twice as large as a shooting star’s body.
What Does Shooting Star Tell You?
- Shooting stars signals a potential downside reversal. It is most effective when it forms after 2-3 consecutive rising candles having higher highs. A shooting star opens and then rises strongly during the day. This shows the same buying pressure seen over the last several periods.
- The candle that forms after the shooting star actually confirms the shooting star candle. At the end of the trading session the sellers push the price down near the open. This shows that the buyers have lost control and the sellers have taken over. The candle after the shooting star gaps and then moves lower on heavy volume.
- This candle helps in confirming the price reversal and indicates that the price will continue to fall.
How to Spot Shooting Star with Resistance Pattern
- The long upper shadow of the shooting star implies that the market tested to find where the resistance and supply was located. When the market found the area of resistance, the highs of the day, bears began to push prices lower ending the day near the opening price.
- The shooting Star is a candlestick Pattern to help traders visually see where the resistance and supply is located. After the uptrend, the shooting star pattern can signal to traders that the uptrend might be over and that long positions could potentially be reduced or completed exited.
How to Use the Shooting Star?
- The shooting star candlestick pattern is a single candle formation used by crypto traders to identify bearish reversals. Crypto traders usually use the Shooting Star Pattern to identify when to exit their positions. Other Crypto traders may use the pattern to identify short entries in to the crypto market.
Difference between Shooting Star and Inverted Hammer
- The inverted hammer and the shooting star looks exactly the same. Both have long upper shadows and small real bodies near the low of the candle. There might be shadow or no shadow available in lower area.
- A shooting star occurs after a price advance and marks a potential turning point lower whereas the an inverted hammer occurs after a price decline and marks a potential turning point higher.
Structure of Shooting Star Candlestick
The structure of Shooting Star Candlestick is almost like an inverted hammer.
Benefits of Using Shooting Star Candlestick Pattern
- One of the main benefits of the shooting star pattern in technical analysis is that it is a simple formation. It is reliable in identifying a bearish reversal-especially if it appears near the resistance level. The shooting star candlestick should never be viewed in isolation.
- It is important to confirm on the signals using technical indicators. For example if the shooting star at the top of the uptrend means possible reversal, the trader can test bearish bias. This is an indicator can pinpoint the degree to which market will move against this current trend.
Characteristics of a Shooting Star Pattern
- At Least half of the candlestick length is taken up the upper wick
- It usually appears at the top of an uptrend
- It is a possible signal of bearish signal
Traders may confuse the shooting star pattern with the inverted hammer candlestick. The reason behind this is both patterns have no longer upper wick and a small body. It is important to note, that an inverted hammer is observed at the bottom
How to Identify the Shooting Star Pattern?
1. Upper Tail
- The Upper tail is also called shadow. It is the line that appears above the candlestick body
- The Upper tail is at least twice or thrice the size of the candlestick body.
2. Lower Tail
- The lower tail is the line extending below the candlestick body. It is either non-existent or is too short
3. 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.
Limitations of Shooting Star
- One candle isn’t call that significant in a major trend. Due to the dynamic nature of the market one candlestick may be insufficient evidence for a bearish victory. It would require further confirmation.
- After short declines the market may continue to rise with long term and historical upward trend. This makes the trader to use stop losses when using this candlestick.
- Shooting Star candlesticks alone aren’t conclusive. They must be paired with other indicators and predictors to get more accurate results.
- This candlestick pattern is useful to understand the current behavior, but it is not a perfect indicator of the market flow and hence should be used along with other indicators. A shooting star candlestick pattern occurs when the assets market price is pushed up quite significantly, but then rejected and closed near the open price.
- The shooting star candlestick pattern must can also be used as a sell signal by aggressive traders. However in order to evaluate potential sell signals other indicators must be employed. It is advisable for the traders to wait for a day for instance to watch the prices and whether it continues to decline on other charts.
- This provides the safety net in the event that the market somehow doesn’t move in the anticipated direction. A trader must first confirm the signal by checking other technical indicators before acting on the pattern formation.
Frequently Asked Questions (FAQs): -
A shooting star pattern is formed in a stock chart when the price opens higher than the previous close, rallies during the trading session, but then reverses and closes near or below the opening price. It has a long upper shadow and a small real body near the lower end of the range.
Key characteristics of a shooting star pattern include a small real body near the lower end of the range, a long upper shadow, and little to no lower shadow. It indicates potential selling pressure and a possible trend reversal from bullish to bearish.
The reliability of a shooting star pattern in predicting market trends depends on various factors, such as the prevailing market conditions, volume, and confirmation from other technical indicators. It is considered more reliable when it appears after an extended uptrend and at significant resistance levels.
To identify a shooting star pattern on a stock chart, look for a candlestick with a small real body near the lower end of the range, a long upper shadow, and little to no lower shadow. The previous candle should have an upward price movement, and the shooting star should signal a potential reversal.