Understanding The Shooting Star Candlestick Pattern

Introduction

The Shooting Star Candlestick Pattern is a candle with a long upper shadow and a small body. The shooting star appears after a strong uptrend in trading. This pattern appears as a signal that the trend is reversing from bullish to bearish. It indicates the weakening strength of trading and the rise in selling activity. This pattern occurs when an asset’s market price is pushed up significantly but later rejected and closed near the open price.

The oversimplified practice of this pattern causes losses and frustration experience to traders. Traders are also advised to avoid opening a short position immediately after identifying the shooting star because it causes risks. So, to make your trading successful with the Shooting Star Candlestick Pattern, you have to understand its importance, characteristics, and visual representation. In this blog, we will tell you about the Shooting Star Candlestick Pattern, a method to identify this pattern, trade with this pattern, mistakes to avoid, case studies, etc, and make your trading easier and more successful.

What is a Shooting Star Candlestick Pattern?

The shooting star is recognized by its long upper wick or small lower body, with less to no lower shadow. This pattern is a reversal candlestick pattern that formed after an uptrend. It indicates the price increase during the trading session and sales pressure is pushed back down near to opening level by the close.

If this candlestick pattern shows a red color, then it indicates that the closing price is lower than the opening price. It underscores the seller’s dominance by the end of the trading session. If the candlestick color shows green, then it still gives you the same indication.

Importance of Shooting Star Pattern

The shooting star patterns have great importance for traders. The candle appears at the top of the uptrend. It either seems green or red. If the candle color is green, it indicates the closed higher or opened lower. If the candle color is red, it indicates the closed lower or the price opened higher. The long upper shadow indicates the unsuccessful attempt by bulls to push the higher price.

The Shooting Star Candlestick Pattern presence during uptrend states that the attempts to drive prices higher. It enables the sellers to enter and exert pressure to drive the price down.

Key characteristics of Shooting Star Pattern

Here are the several characteristics of the Shooting Star Candlestick Pattern

• Small body: The candlestick has a small body and is closer to the lower end of the range
• Long Upper shadow: The upper shadow is a minimum of twice as big as the candle’s body
• No lower shadow: It has a non-existent lower shadow
• Forms after uptrend: This pattern follows after an uptrend
• Indicate bearish reversal: The selling pressure of the pattern starts to get stronger
• Structure of Shooting Star Pattern

The structure of the Shooting Star Candlestick Pattern is unique. It consists of a small body (either bullish or bearish), a long upper shadow (at least twice the length of the body), and a little to no lower shadow. It has a small lower body that indicates opening and closing prices together. The long upper wick of the pattern indicates that the price was increased but faced resistance and fell back close to the opening price. The absence of a lower wick is also a feature of this pattern. This pattern occurs after an uptrend and indicates your potential reversal.

As traders, it is suggested that we understand the structure to interpret market movement. You do not only learn about shapes by understanding structure, but it also equips your knowledge about market dynamics.

Types of Shooting Star Patterns

Here, we tell you about two different types of Shooting Star Candlestick Patterns. A classic shooting star has a lower body, a longer upper wick, and a less or no lower wick, and indicates a falling star. The more versions, like the doji shooting star, have smaller bodies but need more careful analysis. These patterns gain importance after they appear during an uptrend price.

Every type of pattern has unique importance, and when you combine it with other indicators and tools, it strengthens your analysis.

Bullish Shooting Star

The Bullish Shooting Star is regularly associated with the Inverted Hammer. It occurs during a downtrend and indicates a potential bullish reversal. This pattern is characterized by a small body with an extended higher shadow, just like its bearish signal; however, it indicates an unsuccessful effort by bears to decrease stress costs. The presence of a Bullish Shooting Star can also indicate that traders are losing steam, and a bullish reversal can be impending, providing a potential entry point for traders.

Bearish Shooting Star

A bearish shooting star is the top reversal classic signal. It seems after an uptrend and indicates the topping out of the market. The pattern is characterized by a small body at the lower side of the trading level, with a big upper shadow. This indicates that sellers are beginning to outweigh consumers, mainly due to a downward shift in market control. The Bearish Shooting Star warns of a potential end to bullish momentum, urging traders to not forget to secure profits or establish short positions.

Identifying Shooting Star Candlestick Patterns

Identifying shooting star patterns is important for traders. This chart is formed when the price opens higher than the previous close and rallies during the trading session. The pattern indicates that the traders initially pushed the price up, but couldn’t sustain the momentum, mainly to a price close near the open.  For beginners, it’s essential to use this pattern with different technical analysis support and not in isolation.

THE DIFFERENCE BETWEEN SHOOTING STAR, PIN BAR, AND HANGING MAN

Understanding those differences can help traders better interpret price action and make knowledgeable trading decisions based on candlestick patterns.

Shooting Stars Vs Pin Bars

Shooting stars and pin bars are each candlestick pattern that indicates potential market reversals, but they own trends and contexts. The shooting stars generally bureaucracy at the top of an uptrend, indicating a potential bearish reversal. It functions as a long top shadow, a small body located on the lower end, and little to no lower shadow. On the other hand, the pin bar can appear in any trend context however is best at market extremes, indicating rejection of price levels.

Shooting Star vs Hanging Man

The shooting stars and hanging man also share similarities but range in appearance and market positioning. The shooting stars are a bearish pattern occurring after an uptrend, indicating a potential reversal as bears managed to tug the price down at the end of a trading session.

Conversely, the hanging man seems to be on top of an uptrend as well but has a small body on the top end and an extended lower shadow, reflecting that traders were able to push the price down earlier than customers pulled it lower back up. The hanging man indicates that selling stress is starting to outweigh buying interest.

Trading Strategies Using Shooting Star Patterns

There are 3 factors you want to consider while trading the shooting star candlestick pattern – the entry point, the stop-loss, and the profits target. Here is how you can effectively trade this pattern.

Entry Point of the Trade

Entering a position at the right time is vital to maximize the gains of your trade. Some competitive traders generally enter a short position as soon as the shooting star pattern appears. However, this can be notably volatile for the reason that the market can not follow the reversal and will retain the uptrend.

An opportunity and barely conservative technique can be to enter a short position after confirming the trend reversal from bullish to bearish. If the candle succeeding the shooting star is red, the reversal is said to be shown. At this point, you can short the asset. The price at which you enter the placement should be lower than the low of the shooting star.

If you need to undertake a fair, more conservative approach, you could wait until a support level is breached after the formation of the shooting star candle before closing the asset. This approach adds a further layer of confirmation to the trade.

Stop-Loss Point for the Trade

The market movements can be very unpredictable. Implementing an effective stop-loss is important for dealing with risk and protecting your capital if the market actions are against your position.

The perfect stop-loss order in your trade must be barely higher than the high of the shooting star candlestick. This offers you a slight buffer against minor price fluctuations, stopping them from triggering your stop-loss prematurely. In case the reversal does not show up and the bullish trend continues, your stop-loss will be brought about if the price actions above the high registered by using the pattern.

Alternatively, you can also place your stop-loss point close to the most current high or the nearest resistance level.

Profit Target for the Trade

Setting a profit target on your trade could be very vital since it permits you to boost profits and go out earlier than the market has a risk of reversing. The best profit target factor would be the nearest support level of the asset. Once the price of the asset drops to or near the support level, you have to exit the trade by squaring off the position.

Another opportunity approach could be to use Fibonacci retracement levels to become aware of potential areas of price retracements or reversals. Once those reversal points are identified, you can place your square-off trade at or near those levels.

The Reliability of the Shooting Star Pattern

Shooting Star Patterns are one of the most reliable candlestick patterns. The reliability of the shooting star pattern as a bearish reversal indicates that it is affected by several factors. First, the context wherein bureaucracy plays an important role; shooting stars are most reliable after they seem at the top of a well-established uptrend, indicating a potential exhaustion of buying momentum. It is become more reliable when it appears after an extended uptrend. The size of the higher shadow relative to the body is also enormous; a longer upper shadow shows stronger selling stress, thereby increasing the pattern’s validity.

Volume is another vital issue; a shooting star, followed by high trading extent, strengthens its reliability because it shows that the price movement is sponsored by great market interest. Conversely, if the shooting star bureaucracy is a low amount, it could cause a loss of conviction, weakening the reversal signals.

Situations that Affect Reliability of Shooting Star Pattern   

here, we tell you 4 conditions that influence the strength of the bearish reversal indication by the shooting star pattern.

Colour of the Candle’s Body

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

Resistance Level

On the other hand, any other robust indication of a bearish reversal is when the shooting star appears close to a key resistance level. This is because traders commonly generally tend to square off their long positions at or close to key resistance levels and the formation of the pattern close to this factor only reinforces the opportunity of a bearish reversal. 

All-Time High

The appearance of a shooting star pattern at or close to the all-time high price of an asset is also viewed as a robust indication of a bearish reversal, considering traders typically tend to make profits at this factor, leading to a fall in the price.

Relative Strength Index

The opportunities for 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 overbought condition (higher than 70).

Shooting Star Pattern in Different Markets

The shooting star candlestick pattern is a flexible technical analysis tool that traders make use of across various financial markets, along with stocks, Forex, and cryptocurrencies. Its effectiveness lies in its potential to signal potential bearish reversals, making it a valuable indicator for traders.

Stocks

 In the trading market, the shooting star pattern regularly seems to be after a strong upward trend. For examples, a historical example can be seen with Apple Inc. (AAPL). Following a big rally, a shooting star-shaped on its daily chart, indicating a potential reversal. Traders stated the long higher shadow, small body, and next downward movement, validating the bearish indications.

The Forex market

 The Forex market also sees frequent occurrences of shooting stars, especially in currency pairs like EUR/USD. The best example took place whilst the pair reached a new high, followed by a shooting star formation. This setup became confirmed by using a next fall in price, demonstrating how the shooting star can indicate market sentiment shifts amongst forex traders.

Cryptocurrencies

 In the unexpectedly evolving cryptocurrency market, the shooting star pattern can be followed with expanded volatility. For example, during the 2021 bull run, Bitcoin (BTC) experienced a huge price increase, leading to the formation of a shooting star on its weekly chart. The long higher shadow counseled a rejection of higher costs, and the following bearish trend confirmed the effectiveness of the pattern.

Summary of Examples

Common Mistakes to Avoid

In the area of technical analysis, the shooting star candlestick is a robust tool that can indicate a reversal in market sentiment. However, traders make some common mistakes while interpreting this formation.

 A shooting star appears after a price increase and is characterized by a small body on the lower stop of the trading level, with a higher shadow and little to no lower shadow. This pattern indicates that traders, to start with, pushed the price higher, but sellers later overpowered them, riding the price backpedal to shut close to the open. It’s a bearish indication, whilst it occurs after an uptrend, indicating that the bulls can lose control. The traders are suggested to avoid following common mistakes.

Ignoring the Preceding Trend

 A shooting star is large best after an uptrend. Spotting a shooting star after a downtrend does not deliver the same weight and is regularly mistakenly traded as a bearish indicates, whilst it isn’t.

Overlooking Volume

 The shooting star’s reliability increases with better volume on the day it paperwork. The low extent can also indicate a loss of conviction among traders, decreasing the pattern’s significance.

Disregarding the Confirmation

 One needs to watch for confirmation the day after today with a bearish candle ultimately below the shooting star’s near. Acting without confirmation can lead to premature and often incorrect trading decisions.

Trading Based on a Single Indicator

 Relying completely on the shooting star pattern without thinking about different indicators can be misleading. It’s important to take a look at the larger picture by using extra technical analysis support.

Failing to set Stop-Loss orders

Not placing a stop-loss order above the shooting star’s high can result in huge losses if the market moves against the position.

Misjudging the Length of the Shadow

The longer the top shadow, the more bearish the reversal signals. A common mistake is to act on a shooting star with a short top shadow, which won’t be a strong enough indication.

Neglecting Market Context

 The shooting star needs to not be regarded in isolation. Market news, events, and regular sentiment need to be considered, as they can hugely affect the pattern’s effectiveness.

Comparison with Other Candlestick Patterns

Shooting Star vs. Pin Bar

The shooting star and pin bar candlestick patterns are both important indicators in technical analysis, indicating potential reversals in market trends. However, they fluctuate in their characteristics and contexts.

Key Differences

• A shooting star has a big upper shadow, a small body near the low of the trading variety, and little to no lower shadow. It generally appears at the end of an uptrend. Piin bar also functions as a long higher or lower shadow. However, its body is typically positioned away from the extremes of the trading number. The pin bar can seem to be in both uptrends and downtrends.
• The shooting star is broadly speaking viewed as a bearish reversal signal, indicating that buyers drove prices better but lost control, mainly to a near the outlet price. Conversely, the pin bar can be bullish or bearish, depending on its position.
• A bullish pin bar shows potential upward movement after a downtrend, at the same time as a bearish pin bar indicates a possible downward trend after an uptrend.

Similarities

• Reversal Indicators: Both patterns signify indecision in the market and can indicate potential trend reversals. Traders often look for confirmation by the next price action or additional signs.
• Context: Both patterns are well recognized in the context of previous price movements. A shooting star is most effective whilst found on the top of an uptrend, while a pin bar requires careful consideration of its position relative to other candlesticks.

Shooting Star vs. Hanging Man

The shooting star and hanging man candlestick patterns share similarities however are top of their market contexts and implications.

Key Differences

• The shooting star appears on the top of an uptrend and indicates a potential bearish reversal. It has an extended upper shadow and a small body at the bottom.
• On the other hand, the hanging man appears at the bottom of a downtrend and shows a potential bullish reversal. It also has a big lower shadow, however, a small body on the top of the number.
• The shooting star indicates that traders attempted to push prices better but failed, resulting in a bearish sentiment.
•  The hanging man, then again, indicates that traders are starting to exert stress after a downtrend. However, the presence of a long lower shadow indicates that consumers are not in the game.

Similarities

• Indecision: Both patterns represent indecision in the market. They indicate that price moves can not retain in the direction of the winning trend, therefore warranting caution for traders.
• Confirmation Required: Traders typically search for confirmation through the next price movement, extent analysis, or extra signals to validate the potential reversal indicated by those patterns.

Real-World Examples and Case Studies

Let us count on that you need to change USD/EUR, which is presently in an uptrend, making higher highs in the market.

• The currency pair is trending at 2.5, with the current price top at 4.
• As you’re tracking the market, the currency pair makes a new price high at 5.5, right earlier than the market closes at 4.2, better than the day gone by’s close.
• You are determined to enter your first trade at this factor and place an extended order.
• The next day, the market opens at 4.3, which is once more higher than yesterday’s close, and trades between 4.3 and 4.6 the full day, creating a cutting-edge high of 6 and no lows.
• You are determined to exit your first order at 5.5, which was also the previous day’s high, and wait until the market paperwork a new trend. At this factor, the selling stress available on the market grows as increasingly more traders, such as you, exit the trade to experience the price increase.
• The selling stress leads to a reversal in the market, which is shown after another bearish or red candlestick is trended the next day.
•  The current candlestick opens at a higher low of 1.5, confirming the downtrend reversal. At this factor, deciding to short the trade and input the market at 1.5. Soon after, the market falls even, with price points of 1, 0.75, 0.60, 0.50, and so on. This alerts you to short the trade and hold them until the market rises again.

Conclusion

The shooting star candlestick pattern is the best indicator for traders to use to see a bearish trend reversal. Traders need to know its structure so they can analyze market direction properly. Before acting on a shooting star signal, you should get confirmation of reversal from other technical indicators or tools.

For example, you have to look at additional signs of weakness, such as bearish divergence in MACD. When you consider this, you will get confirmed reversal signals, and reduce risks of losses and false alerts.