What is the first thing that comes in your mind when you read the term “Shooting Star”? Isn’t a star falling close to the earth’s surface?
The shooting star is a single bearish candlestick pattern that is common in technical analysis. The candle falls into the “hammer” group and is a first cousin of the – hanging man, hammer, and inverted hammer.
What is the Shooting Star Pattern?
A shooting star formation is a bearish reversal pattern that consists of just one candle. It is formed when the price is pushed higher and immediately rejected lower so that it leaves behind a long wick to the upside. The long wick should take up at least half of the total length of the shooting star candle – see image below.
Additionally, the closing price should be near the low of the candle. As you can see, this creates an overall bearish structure because prices were unable to sustain their higher trade.
A similar structure is observed with the Inverted Hammer pattern however, the Inverted Hammer relates to a bullish reversal signal as opposed to a bearish reversal signal. This candlestick pattern is often revealed at the bottom of a downtrend, support level or pullback.
Formation of Shooting Star:
The Shooting formation is created when the open, low, and close are roughly the same price. Also, there is a long upper shadow, generally defined as at least twice the length of the real body. When the low and the close are the same, a bearish Shooting Star candlestick is formed.
The bearish shooting star is considered a stronger formation because the bears were able to reject the bulls completely plus the bears were able to push prices even more by closing below the opening price.
What does Shooting Star tells you?
Shooting stars indicate a potential price top and reversal. The shooting star candle is most effective when it forms after a series of three or more consecutive rising candles with higher highs. It may also occur during a period of overall rising prices, even if a few recent candles were bearish.
A shooting star opens and rises strongly during the trading session, showing the same buying pressure that is seen over the last trading sessions. At the end of the trading session, the sellers push the price down near the open. This shows that the buyers have lost control by the end of the day, and the sellers have taken over.
The long upper shadow indicates that the buyers are losing position as the price drops back to the open.
The candle that forms after the shooting star is what confirms the shooting star candle. The next candle’s high must stay below the high of the shooting star and then proceed to close below the close of the shooting star. Ideally, the candle after the shooting star gaps lower or opens near the prior close and then moves lower on heavy volume. A down day after a shooting star helps confirm the price reversal and indicates the price could continue to fall. Traders may look to sell or short sell.
If the price rises after a shooting star, the price range of the shooting star may still act as resistance. For example, the price may consolidate in the area of the shooting star. If the price ultimately continues to rise, the uptrend is still intact and traders should favour long positions over selling or shorting.
Difference between Shooting Star and Inverted Hammer
The inverted hammer and the shooting star look exactly the same. They both have long upper shadows and small real bodies near the low of the candle, with little or no lower shadow. The difference is context.
A shooting star occurs when the price moves up and then the prices fall. Whereas an inverted hammer candlestick occurs after a price falls and it rises.
Limitations of Shooting Star:
One should not only rely on a candle pattern like in a shooting star for making trading decisions.
This is why confirmation is required. 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.
One should also use stop losses when using candlesticks to control the losses.
A candlestick pattern is more significant when it occurs near an important level signalled by other forms of technical analysis.
- A shooting star occurs after an advance and indicates the price could start falling.
- A shooting star is a type of candlestick pattern which forms when the price of the security opens, rises significantly, but then closes near the open price.
- A shooting star is a bearish candlestick pattern having a long upper shadow and no lower shadow at all.
- There is a difference between a shooting star and inverted hammer.
- One should not only rely on a candle pattern like in a shooting star for making trading decisions.