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How to Use Shooting Star Pattern in Trading Stocks?

Skylar Williams

Aug 02, 2022 15:50



Traders utilize candlestick patterns to forecast price movement direction. Candlesticks give a great deal of information regarding the likely behavior of market prices. Price has hit its top, and a reversal is imminent, according to shooting star patterns. This pattern is most effective when it appears following a string of ascending bullish candlesticks. If you trade improperly, you may find yourself on the wrong side of a breakout. It is crucial to your success in trading this pattern that you analyze the structure of the trend leading up to the shooting star candlestick.


It is significant when the shooting star occurs during a probable market peak. The candlestick might signal a reversal in the minor uptrend. A pattern might signal a shift in the Intermediate trend. As it looks to be under perfect control, the stock price should surge. A profit will be realized at some time during the day or week. The stock closes with little change, as shown by the modest actual body. Therefore, a shooting star has a small actual body and a substantial-top shadow. There will be no or a minor bottom shadow.

What is a shooting star candlestick pattern in stocks?

Candlesticks often provide information for proper technical analysis and highlight a few aspects of the market on a given day. The stock market is either uncertain (Doji Candlestick), bullish (Hammer Candlestick), or bearish (Shooting Star Candlestick) in this instance.



The Shooting Star Candlestick Pattern happens when the initial price of a security is higher than its closing price and the positive fluctuation (the highest price for the day) is larger than twice the difference between the opening and closing prices. The day's lowest price is either the closing price or less.


Consequently, the shooting star candlestick, typically symbolized by the color red to emphasize its bearish character, has a tiny body with an extended wick above it and either a little or no wick emanating from it the body of the candlestick.


The frequent cause for this specific form of the shooting star candlestick is that when the market opens, bulls' purchasing power drives the market higher. They quickly encounter the bears, who began selling the shares when they hit a certain price high. Since the bears are selling in greater quantities than the bulls, the security closing price is lower than its initial price.


These are daily patterns. It opens with a premium, trades significantly higher, but closes around its opening price. The bearish counterpart to the inverted hammer.


They feature a tiny body with a short lower wick and a lengthy high wick, and it should be at least twice as large as the actual body.


We are all aware that not every candlestick and pattern will be flawless. Therefore, studying and getting familiar with all candlesticks and patterns is essential. Doji candlesticks are indecision candles, and although these patterns may appear to be doji, they are not.

What does the shooting star pattern tell traders?

The context is essential

Shooting stars are indicative of a possible price peak and reversal. It is most effective when the candle rises after three or more successive rising candles with higher highs. It may also develop during a time of rising prices generally, even if some recent candles have been bearish.


After the advance, the shooting star opens and then climbs dramatically throughout the day. This demonstrates the similar purchasing pressure observed over the preceding time periods. Even if sellers come in and knock the price back down to around the open, erasing the day's gains, progress is achieved during the day. This indicates that buyers lost power at the end of the trading day, and sellers may now be in charge.

The form is essential

The extended upper shadow indicates that purchasers who purchased during the day are now in a losing position since the price has returned to its opening level.


The candle that forms following the shooting star is evidence that the candlestick depicts a shooting star. The peak of the next candle must remain lower than the peak of the shooting star and then close below the closing point of the shooting star. Typically, the candle that follows a shooting star may gap downward or open around the previous close before moving lower on significant volume. A down day following a shooting star confirms the price reversal and indicates that the price may continue to decline. Traders may attempt to sell or sell short.


Suppose the price rises following a shooting star, the shooting star's price range may continue to operate as resistance. As an example, the price may concentrate on the region depicted by the shooting star. If the price continues to rise, the uptrend remains intact. Long positions are preferable to selling or shorting.

How can the shooting star pattern be identified?

For a candlestick formation to be termed a shooting star, it must happen amid a price increase. In addition, the gap between the highest price of the day and the starting price must be double the size of the shooting star's body. There should be little to no shadow beneath the body.




Traders examine if the difference between the day's highest price and the opening price is double the length of the shooting star. Additionally, the difference between the closing price and the day's lowest price is either negligible or nonexistent.


When the low and close are identical, a bearish shooting star candlestick occurs and is viewed as a stronger pattern since the bears were able to reject the bulls and drive prices even farther by closing below the opening price.


This candlestick pattern is viewed as less bearish yet bearish when the opening price and bottom price are substantially equivalent. The bears were able to combat the bulls, but they were unable to return the price to its opening level.


This pattern's lengthy upper shadow indicates that the market tested to see where resistance and supply were positioned. When the market reached the region of resistance (the day's highs), bears began to drive prices lower, with the day's close being at the starting price. Consequently, the bears resisted the bulls' upward surge.

Comparison of shooting star with inverted hammer

Since the shooting star and the inverted hammer are both reversal candlestick patterns, are they distinct from one another? Despite the fact that they both imply a bearish reversal, they are extremely distinct.


An inverted hammer candlestick is a type of candlestick pattern that develops when a downward price movement reaches its low. This indicates that an inverted hammer candlestick is a bullish reversal pattern and appears during a downturn, as opposed to a shooting star, which is a bearish reversal pattern and appears during an uptrend.


The shooting star formation occurs due to price advantages since it indicates that the price action has a greater tendency to move downward. In contrast, an inverted hammer candlestick is formed as a result of a price decline, indicating that the price movement is likely to move higher.

What advantages and disadvantages does the shooting star pattern have?

Advantages of the shooting star pattern

The shooting star pattern is a fantastic forex trading method that offers several benefits to forex traders and investors. Some of its benefits are as follows:


A big benefit is an ease of detecting the star candlestick pattern and trading the shooting star. In comparison to other candlestick patterns, the long top shadow and the short lower shadow coupled with the little body of the candlestick pattern are particularly easy to distinguish.


In forex trading, the shooting star candlestick is a good sign of technical analysis.


Technical signals can occasionally provide erroneous information, but shooting stars are quite dependable; when the star candlestick pattern reaches the horizontal resistance level, it confirms the bearish candlestick pattern and, in the absence of this confirmation, a bearish reversal.


The location of the stop loss is immediately obvious on the trading chart; it is advised that the stop loss be placed above the shooting star candlestick.


The star candlestick patterns are compatible with other momentum indicators, such as the Moving Average Convergence Divergence (MACD) and Relative Strength Index (RSI).

Disadvantages of shooting star pattern

It is not prudent to base trading choices only on shooting star patterns.


It requires confirmation using the next day's candle, or other technical analysis indicators can be used in conjunction.


It necessitates the use of stop losses to limit potential losses.

What type of pattern is the shooting star?

Depending on the trend's structure and chosen risk-to-reward ratios, the shooting star pattern can represent a failed breakout or a trend termination/reversal pattern.


The shooting star pattern has no official definition, and its usefulness is mostly subjective. It refers to reversal-style trading patterns triggered by the shooting star candlestick.


When trading such patterns, it is necessary to identify your optimum risk-to-reward ratio.


If you wish to profit from a genuine trend reversal, the pattern is of the trend termination sort.


This means that when the breakout fails, you are not only searching for a large first counter-trend move but also a new trend in the opposite direction.


It is a failed breakout or "fake out" pattern when you are not looking for a trend reversal but rather a single downward trend swing when the breakout fails.


These two characteristics are significant because they determine the risk/reward profile that should be applied.


The success percentages for trend reversals are modest, but the few profitable bets are often home runs. In order to win at these patterns, you must manage multiple minor losses and remain on the train until the huge gains arrive.


In contrast, the profit structure of a failed breakout pattern is nearly the reverse of that of a reversal pattern. Due to the pattern's high chance of success, losses are often minor and frequent, with larger losses occurring seldom.


The challenge in managing this risk/reward profile often stems from handling failed trades surgically by swiftly eliminating losses.


Consider that your trade selection should fluctuate based on the risk/reward profile you pick.


The probabilities of a failed breakout and trend reversal are distinct, and this must be considered prior to place trades.

Trading a shooting star candlestick

The shooting star candlestick pattern is easy to recognize, making it a profitable trading method for the majority of financial market traders. This pattern may be used to trade futures, currencies, stocks, foreign exchange, and other financial instruments. If a stock is on an uptrend and a shooting star candle appears, there is a strong possibility that the trend will reverse. Traders utilize this candle to open short positions, believing that the bullish trend is losing momentum. However, every trader must stick to a few measures while employing this pattern to make crucial trading decisions. These consist of:


Entry: Before placing a trade based on this pattern, a trader must ensure that the prior price action was aggressively positive.



Limit loss: Experts advise employing a stop-loss order when trading through this pattern. The stop-loss order refers to the purchase or sale of a stock when the price reaches a specified point, known as the stop price. A stop order becomes a market order when the stop price is attained.


Making a profit: As a shrewd trader, you must select a price goal that corresponds to the size of the shooting star pattern.


Typically, trading with the reversal pattern is rather simple. Initially, the trading analysis identifies prices that are heading higher. Then, a shooting star candlestick pattern develops. Observing a larger upper candlewick and a smaller body indicates the pattern's creation.


The pattern is then confirmed by the bearish candle that follows the shooting star. Therefore, you sell the security and set a stop-loss order immediately above the upper wick to protect your short position.


Therefore, your short position will be protected if the price makes an unexpected positive move owing to considerable volatility. Maximum loss is determined by the distance between the shorted high priority queue (HPQ) level and the stop loss level order.


You must remain in the trade to maximize earnings until the price movement closes the candle above your minimum objective. When the candle reaches the minimum objective and becomes significantly larger, it is time to quit the market.

How to use the shooting star pattern in trading stocks?

The trading analysis for a shooting star begins with the identification of an upward price trend in a particular stock's chart. When the shooting star candlestick pattern develops, we see a little candle body and a large top candlewick, which verifies the structure of the pattern and whether the next candle after the shooting star is bearish.


After pattern confirmation, we may now sell the shares. A stop-loss order must be placed above the upper wick of the shooting star candle to defend against an unexpected bullish surge triggered by the market's extreme volatility.


During trading with a shooting star, our maximum loss will equal the distance between the level at which we short HPQ and the level of our stop-loss order. Always aim for a target three times the pattern's size. Now we must wait until the price movement closes a candle beyond the minimum objective we've established.


During the bearish movement, the price might undergo a correction. Then, downward activity resumes, and the price action ends a candle below the pattern's minimal objective.


As the shooting star candle pattern indicates that the trend may be reversing. This provides evidence of short HP at the onset of a developing bearish trend. The shooting star achieves the three-times-the-size-of-the-candlestick goal regardless of course corrections.

Conclusion

Even on a bigger or more intricate graph, shooting star candlesticks are distinguishable because of their particular characteristics, such as the small body and long upper-tailed wick. Not only are they valuable for comprehending and visualizing patterns and present behavior, but also for anticipating future market trends and directions. The formation of a shooting star candlestick pattern occurs when the opening price of an asset climbs dramatically before closing near the opening price. Both experts and novice traders often utilize this pattern since it is simple to recognize and generally reliable.


To limit risk, it is recommended to utilize it in conjunction with other metrics such as price trends, volume and momentum indicators, moving averages, and others. It provides you with a safety net in case the market does not move in the desired direction.

FAQs

What is the wick in candlestick patterns?

Wick is also referred to as candlestick shadows. It is a narrow line emanating from the body of the candlestick. It indicates the highest and lowest stock prices for a certain time. How long or short a wick is a measure of the volatility of stock prices.

Can a shooting star candle be green?

The shooting star pattern has no specific or fixed color; the shooting star candlestick can be any color, black, white, red, or green, depending on the trading chart settings.


A shooting star, however, cannot be green according to the traditional trading chart setting of red and green candles for bullish and bearish patterns.

What are the common mistakes in using candlestick patterns while trading?

In trading, many individuals make the error of examining candlestick patterns in isolation. Along with candlestick patterns, it is essential to evaluate additional indications for a holistic picture.