Shooting Star Candlestick - How to Use It in Stock Trading
By Stelian Olar , Updated on: Nov 06 2023.
Have you ever been watching a stock chart and seen what looks like a shooting star streaking across the screen?
If so, you may have witnessed the shooting star candlestick pattern in action.
But what is a shooting star candlestick pattern exactly and how can you use it in your trading?
When I first started trading stocks, I would see these odd-looking candlestick shooting stars pop up from time to time but had no idea what they meant. I later learned that the shooting star candlestick pattern can give key insights into potential reversals in stock price trends.
In this article, we'll explore:
- The shooting star candlestick definition,
- How to identify it on charts,
- And most importantly - how to trade shooting star candlesticks to catch the end of an uptrend.
The shooting star is a powerful chart pattern that signals potential price reversals.
Trading is often about spotting changes in momentum as early as possible and being able to recognize and trade shooting stars gives you an edge in detecting when buyers are losing steam and sellers may be gaining control.
By the end of this article, you'll have a firm grasp on what shooting stars are, what they tell us about supply and demand in a stock, and how to profitably trade them. Let's start decoding these mysterious candlestick clues to make smarter moves in the market.
What Is a Shooting Star Candlestick Pattern
In technical analysis, a shooting star candlestick is a bearish reversal pattern that forms after an uptrend. The meaning of the shooting star candlestick pattern is that buying pressure is starting to dissipate and a potential trend reversal may be on the horizon.
The shooting star is sometimes referred to as the “shooting star Japanese candlestick” pattern.
Specifically, a shooting star pattern candlestick has a long upper wick, little or no lower shadow, and a small real body near the low of the day. It appears after an advance and signals that buyers are losing control and sellers may be gaining strength.
The shooting star candlestick formation occurs when the price opens, rises significantly intraday, but then closes near the opening price again. For the candlestick to qualify as a shooting star, the long upper shadow must be at least twice the length of the real body.
What Does a Shooting Star Pattern Look Like
When I first started learning about candlestick chart patterns for trading, the shooting star bearish candlestick patterns was one of the most distinct shapes that stood out to me.
At first glance, the shooting star looks like a candle with a long "tail" on the top, kind of like a comet streaking across the sky.
As a beginner trader, I found that visualizing these candlestick shapes helped me recognize patterns faster on a price chart. The more price charts you look at, the more intuitive the shooting star candlestick meaning will become over time.
The opposite of a shooting star candlestick would be a candlestick with a small real body near the top, and a long lower shadow – known as the hammer candlestick. This upside down shooting star indicates potential bullish momentum instead of bearish.
The difference between the hammer and shooting star candlestick is that the Hammer looks like a “T” shape. Probably, the Gravestone Doji resembles the shooting star candlestick Forex the most – the only difference is that the opening price and closing price are equal to the Gravestone Doji.
Inverted Hammer and Shooting Star Candlestick
Now, the shooting star looks similar to the inverted hammer and hanging man patterns you may see.
Both have small bodies and long upper shadow, but the only difference between inverted hammer and shooting star candlestick patterns is where they appear on a stock price chart:
- Inverted hammers appear at the bottom of a downtrend
- Shooting stars appear at the top of an uptrend
Similarly, the hanging man and shooting star candlestick look very much alike. The hanging man has the small real body at the top of the candlestick rather than the bottom like the shooting star and a long lower shadow.
Formation of Shooting Star Candlestick
Now that we've covered the shooting star candlestick pattern meaning, let's look at some real shooting star candlestick chart pattern examples so you can see exactly what to look for on a stock chart.
Types of Shooting Star Candles
There are variations but the core shooting star themes of long shadows and potential trend reversals after advances remain constant. But there are some variations to be aware of.
Shooting Star Candlestick in Downtrend
While typically a reversal pattern, shooting stars can form within downtrends as continuation signals. Pay attention to the upper shadow length and size of the real body for clues. On rare occasions, a shooting star candlestick at bottom of a trend may signal a pullback before more downside.
Shooting Star Candlestick in Uptrend
The classic shooting star appears after an uptrend and forewarns of a potential bearish candlestick reversal. These are the high probability patterns traders watch for.
Inverted Shooting Star Candlestick
An inverted shooting star candlestick looks like an upside down shooting star. It indicates continued bullish momentum rather than a reversal.
Inverted Hammer Shooting Star Candlestick
Combination inverted hammer/shooting star candles can form. Analyze in the context of the broader price swings.
Bullish and Bearish Shooting Star Candlestick Patterns
When it comes to shooting stars in the financial markets, the direction of the existing trend is crucial in determining if it's a bullish or bearish signal.
A bearish shooting star candlestick appears after an uptrend, signaling a potential peak and reversal lower. The long upper shadow shows sellers overtaking the buyers during the session despite the uptrend. Not the bulls you want to see!
On the other hand, in a downward trend, a bullish shooting star candlestick can emerge after a decline. This long upper shadow indicates buyers are starting to step in pushing the prices and take control away from the bears. The downtrend may be nearly exhausted.
This is where paying attention to the color of the real body comes in handy too. The red shooting star candlestick will have a black or red body, confirming bearish potential. But the green shooting star candlestick has a green or hollow body, showing the bulls still have some strength.
How to Trade the Shooting Star Pattern
So let's walk through an effective approach for putting the shooting star into action. We first need to spot the shooting star candlestick on our chart. Visually, look for these 3 factors:
- A small real body near the lows
- A long upper wick
- Increased volume adds credibility to the bearish shooting star candlestick pattern.
After spotting a candlestick shooting star pattern:
- The stop losses are placed above the high of the candle. This protects you if the pattern fails.
- Look to enter a short position as the uptrend rolls over, confirmed by the next bearish candlestick break below the shooting star candle low. You can practice trading shooting stars with a risk-free demo account from Pepperstone to get experience before trading live markets or if you’re a US resident try eToro demo account.
- Sell short, use put options, or trade bearish ETFs to trade the shooting star.
- Book partial profits on the way down rather than getting greedy.
- After hitting your initial target, sell half the position and move the stop loss order on the remainder to breakeven. This locks in gains while riding the downtrend further.