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Shooting star is most powerful candlestick pattern if you learn to trade this pattern you can easily make a decent profit per day.
A shooting star candlestick is a price pattern that is formed when the price of security opens and first advances and then declines and falls to a price close to the opening price. Shooting star candlestick patterns signal the start of a price reversal where the trend begins to turn bearish. Shooting star candlesticks comprise a small body, a long upper tail and a short lower tail. The lower tail is at times absent in some shooting stars. The image below depicts a shooting star candlestick pattern.
The image shows the body of the candlestick, the long upper tail or wick as well as the short lower wick or tail. The body of the shooting star is the wide part of the candlestick, which represents the difference between the opening and closing prices of the security. The long upper wick represents the advancing price from the opening price to the highest price for the day. The lower short wick represents the drop in price at the market close to the level close to or below the opening price. A shooting star’s body is either green or red in colour. The green body signifies that the opening price is lower than the closing price, although the two are very close. The red body signifies that the opening price is greater than the closing price. While reading a shooting star candlestick pattern, investors and traders must pay attention to three aspects including the active price trend at the opening of the shooting star, the price drop that follows in the latter half of the day, and the need to confirm the trend using the candlesticks from the following days.
The pattern formed by a shooting star candlestick during the price drop resembles the rapid movement of a shooting star when it comes crashing into the earth’s atmosphere before burning up.
Shooting star candlestick patterns tell traders about upcoming bearish trends in the market. Traders who spot shooting star patterns in the candlestick price charts, wait for the following pattern the next day. Traders consider the market trend bearish if the pattern that follows a shooting star candlestick pattern also reflects a price drop. Traders also make trading decisions based on the shooting star patterns. Traders sell or resort to shorting if the patterns following a shooting star pattern also indicate a price drop.
How is a Shooting Star Candlestick Pattern structured?
A shooting star candlestick is structured with a real body, a long upper tail or wick and a short or no lower tail or wick. A shooting star candlestick’s structure represents the rapid downward movement of the price toward the close of the market. For a candlestick pattern to be considered a shooting star, the upper wick must be at least twice the length of the body of the candlestick.
the price chart above depicts the structure of the shooting star candlestick pattern. An initial uptrend is seen in the area marked (1), as the prices are on the increase. At the end of the uptrend, a shooting star candlestick pattern with a long upper wick is visible. The long wick or shadow that is marked as (2) is at least twice the size of the body of the candlestick. The body of the candlestick that is marked as (3) is red as the opening price is more than the closing price.
A shooting star opens with an advancing price as there is high demand for the security and buyers continue to purchase the security. Towards the end of the day, however, the price is driven down to a level below or close to the opening price. The long upper wick, which is also referred to as a tail or shadow, represents the transition from buying pressure to selling pressure, as buyers who made purchases during the day lose their gains with the decreasing price. A short lower shadow, wick or tail is formed when the sellers push the price below the opening price. Shooting star patterns are of two types red shooting stars and green shooting stars.
How to read Shooting Star Candlestick Pattern in Technical Analysis?
In the technical analysis of a shooting star candlestick pattern, there are three things to be considered. The image below depicts the three things that are to be kept in mind while reading the shooting star candlestick pattern in technical analysis.
Firstly, investors and traders must take note of the price advance. As the image shows, a shooting star occurs at the end of a bullish prior trend. In a shooting star candlestick pattern, the price advances considerably after the market opening. The sharp price increase is indicative of the existence of a buying pressure that has been present for the past bullish period. As the number of buyers increases the wick of the candlestick gets longer.
Secondly, investors and traders must pay attention to the rapid price drop that occurs later in the day. As seen in the image above, in a shooting star candlestick pattern, the price starts to drop in the latter half of the day after a significant advance. The price then, drops to a level very close to the opening price of the security, making the body of the candlestick very small. The decline in prices is caused by the increase in the number of sellers who push the price of the security to a level close to the opening price for the day. The long wick of the shooting star stands for the sellers who took over the buyers over the progress of the day.
Thirdly, investors and traders reading a shooting star candlestick pattern need to confirm the trend reversal. For trend confirmation, investors and traders must look out for the candlestick patterns that follow the shooting star patterns. As the image above depicts, the candlesticks that follow the shooting star pattern depict a price decline with declining closing prices. The trend is considered to have turned bearish only if the pattern following the shooting star also depicts a price drop. In such cases, shooting star candlestick patterns are signals of upcoming bearish price reversals. The accuracy and reliability of shooting star candlestick patterns depend on the candlestick patterns that follow the shooting star candlestick pattern.
How to Trade with Shooting Star Candlestick Pattern in Stock Market?
The three main criteria that investors and traders must keep in mind while trading with shooting star candlestick patterns is listed below along with a price chart that depicts the steps to follow while trading with shooting star candlestick patterns.
Deciding on the entry point
The first thing to be kept in mind while trading with shooting star candlesticks is deciding on the entry point. It is important that traders check the active price trend. As seen in the image above, a shooting star occurs at the end of a bullish uptrend. Investors must enter the trade only when the trend is bullish and the security price is on the increase. The shooting star pattern must be confirmed once an active bullish trend has been identified. To confirm the shooting star pattern, investors must identify a candlestick with a small body and a long wick and wait for the candlestick to drop below the lowest price point of the shooting star’s body. The image above depicts what a shooting star looks like with its small real body and long upper shadow and wick.
Using a stop-loss order
The second key point to remember while trading with the shooting star candlestick pattern is to use a stop-loss order. A stop-loss order is a pre-decided order that states that a security can be either bought or sold when it reaches a certain price known as the stop price. Stop-loss orders help to reduce the loss from trading by locking in a profitable position. It is advisable to enter stop-loss orders while trading with shooting stars as it protects the investors from incurring huge losses when the price plummets. As shown in the image above, a stop loss order can be placed right above the upper wick to minimize losses and gain maximum returns.
Deciding on profit target
The third key step in trading with shooting star candlestick is to decide on a price target. The price target must be the length of the candlestick pattern to gain maximum returns. As shown in the image the length of the candlestick is measured from the base of the body to the tip of the upper shadow or wick. The minimum target for the trading strategy is kept at three times the length of the entire candlestick, as depicted by the blue arrow in the image above.
While trading with shooting star candlestick patterns selling and shorting are two of the commonly used methods that yield good returns in trading with shooting star candlestick patterns. The ideal time to trade using the shooting star candlestick is when the pattern has been formed after two or three consecutive highs.
When is the best time to Trade using Shooting Star Candlestick Pattern?
The best time to trade using the shooting star candlestick pattern is when the shooting star is formed following two or three days of consecutive highs. The shooting star formed after two or three days of highs as the security price is close to or at the highest price point, within that particular time frame. Trading at such a time can yield maximum profits.
