Shooting Star Candlestick Pattern – Strengths And Trading Ideas

Observing candlestick patterns is one of the many ways traders predict an asset's price movements. The shooting star trading pattern is one of the many candlestick patterns you can see on the price charts of assets. As a trader, understanding the pattern, its visual cues and its significance is crucial. Continue reading to find out all about this particular candlestick pattern and how to trade with it.  

What is the Shooting Star Candlestick Pattern?

The shooting star is a single candlestick pattern with a distinct visual appearance. The pattern is characterised by a small body at the bottom of the candle, a long upper wick and a short or absent lower wick. The upper wick must be at least two times the length of the candle’s body. 

The small body at the candle’s lower end and the long upper wick give the pattern the appearance of a star falling from the sky, hence the name "Shooting Star." 

Understanding the Shooting Star Candlestick Pattern 

To fully grasp the significance of this candlestick pattern, it's essential to understand the psychology behind its formation.

The shooting star is a bearish reversal candlestick pattern that usually occurs at the top of an uptrend. The appearance of the pattern during an uptrend would most likely lead to a shift from a bearish trend to a bullish trend.

The long upper wick of the pattern suggests that despite an attempt by the buyers to drive prices higher, the session ended with sellers stepping in and pushing prices back down. Since the long upper wick signifies potential exhaustion among buyers, the emergence of the shooting star during an uptrend often paves the way for a possible downturn in prices.

The candle’s body, meanwhile, can either be red or green, depending on the opening and closing prices. For example, if the opening price is lower than the closing price, the body will be green. On the other hand, if the opening price is higher than the closing price, the body will be red. Although both red and green candlesticks are considered indicators of bearish reversals, traders often view a red shooting star as a stronger sign of a reversal. 

Generally, shooting star candlesticks do not have a lower wick. However, there have been many instances where traders have spotted the pattern with very short lower wicks.     

How to Trade the Shooting Star Candlestick Pattern? 

Trading candlestick patterns requires entering at the right time and setting the right target and stop-loss points. Here are a few guidelines you can follow when trading the shooting star pattern. 

• Finding the Entry 

You can consider entering into a short position once the price of the asset drops below the lowest price point of the shooting star candlestick pattern. However, make sure to first confirm the trend reversal from bearish to bullish before you short the asset. This way, you can avoid falling prey to false reversal signals.    

• Setting the Target 

The ideal exit point for the trade could be the nearest key support level for the asset. This is due to the chances of the asset bouncing back up after testing the support level. However, some traders prefer to book partial profits and wait to see if the downtrend continues. 

If the downtrend continues, they will square off their remaining short position at the next key support level. If the trend reverses after testing the support level, the traders square off their remaining short position immediately to preserve profits.   

• Stop Loss 

Setting a stop-loss point is very important when trading. It reduces the risk of losses significantly if the market moves against you by automatically squaring off your position. The ideal stop-loss point for the trade would be the highest price of the shooting star candlestick pattern. 

This way, you can prevent minor price fluctuations from inadvertently triggering the stop-loss order. If the reversal eventually fails and the market rises sharply, the stop-loss order would get triggered around the highest point of the pattern, protecting you from further downsides and losses. 

Situations that Influence the Strength of Shooting Star Candlestick Pattern    

Four major situations heavily influence the strength of the bearish reversal indication by the shooting star pattern. 

1. Colour of the Candle’s Body 

As you have already seen, if the shooting star candle’s body is red, it could be interpreted as a stronger sign of a bearish reversal. 

2. Resistance Level

On the other hand, another strong sign of a bearish reversal is when the shooting star appears near a key resistance level. This is because traders usually tend to square off their long positions at or near key resistance levels and the formation of the pattern near this point only reinforces the possibility of a bearish reversal.  

3. All-Time High 

The appearance of a shooting star pattern at or near the all-time high price of an asset is also viewed as a strong indication of a bearish reversal since traders usually tend to book profits at this point, leading to a fall in the price. 

4. Relative Strength Index 

The chances of a bearish reversal tend to be very high if the shooting star candle’s formation coincides with the asset’s Relative Strength Index being firmly in the overbought zone (higher than 70). 

Conclusion

The shooting star candlestick pattern is a powerful indicator of a bearish trend reversal. However, it is essential to confirm the reversal before taking up a short position based on the pattern. This way, you can protect yourself from entering into a trade based on false signals. The best way to confirm the reversal is to look at the candle that immediately follows the pattern. If it is also red, then the reversal is said to be confirmed.   

The Research 360 platform, powered by Motilal Oswal, has a special ‘Stock Screeners’ feature that can quickly identify and filter out stocks where the shooting star candlestick pattern has made an appearance. Sign up for Research 360 right away and make your stock selection process seamless and easy.