Shooting Star patterns are interpreted as a bearish reversal pattern. Shooting stars appear in up trends but are a bearish candle. These patterns look just like inverted hammer candlesticks but are found near resistance levels. They are typically red or black on stock charts. Look for price to fall below candle to confirm bearish direction. Watch our video on how to identify and trade shooting star patterns.
What Is a Shooting Star Candlestick Pattern & How to Identify These Candlesticks?
A shooting star candlestick is typically found at the peak of an uptrend or near resistance levels. Shooting star candlesticks consist of a smaller real body with a longer upper wick and no lower shadow. They are typically red or black on stock charts.
Charts are made of many different Japanese candlesticks patterns. These patterns gauge the emotions of traders all over the world. We trade on the fear and greed of others and candlestick charts allow us to see these emotions.
Basics of Shooting Star Patterns
They are single day patterns. It opens higher then trades much higher but ends up closing near it’s open price. It is the bearish answer to the inverted hammer.
They have a small real body with little to now lower wick and a long upper wick. It should be at least two times the size of the real body.
We all know that not every candlestick and pattern are going to be perfect though. That’s why it’s important to study and know all different types of candlesticks and patterns. Doji candlesticks are indecision candles and while these patterns may look like a doji, it’s not. It means something different (bookmark our daily penny stocks list and swing trade watch lists which are updated daily).
Technicals of Shooting Star Patterns
Shooting star patterns indicate that price has reached its peak and a reversal is coming. This pattern is the most effective when it forms after a series of rising bullish candlesticks.
Each bullish candlestick should create a higher high. Their upper wick is formed as buyers drive price up at some point during the day. But selling pressure pushed price back down so that it closed near the opening.
As price is rising during those green day, buyers start getting impatient wanting a pullback so they can get in at a good price. Remember the stock is already in a bullish uptrend so price has been rising for awhile.
Buyers cause a buying frenzy causing the upper wick to form. This is the greed we’re talking about. Shorts see the and capitalize on said greed. Pushing price back down. Thus a shooting star is formed. Take our free candlesticks patterns course. Also, take our candlestick reversal course.
Confirmation of shooting star patterns are very important. The candle that forms after the shooting star is what confirms the pattern. The next candle can’t make a higher high.
Otherwise the reversal is null and void. The close of the new candle must also close under this pattern. If you look at the chart above, you’ll see that the next candle did in fact close lower.
The second candle closing lower, tells you that the greedy buyers are now taking losses. They either have to hold and wait it out or cut their losses and move on.
Greed usually turns to fear though and the panic selling begins. You can also see that on the chart above as large bearish candlesticks formed; letting you know the bears are in control for now.
How to Trade Shooting Star Candlesticks
- Knowing how to trade shooting star candlesticks is quite simple:
- Traders take a short at the break of the low and use a candlestick close above high as a stop.
- Some may take a long position when price breaks above the high of the candlestick.
- Then use a candlestick close below the low as a stop level.
Using technical analysis with shooting star patterns may help you not to get trapped. Candlesticks form key areas of support and resistance. Traders pay close attention to that.
Are the RSI (relative strength index) and MACD (moving average convergence divergence) indicating a stock is over extended? Overextended stocks want to return to equilibrium.
Equilibrium is usually found at the moving average lines such as the simple moving average formula. You can also use the VWAP trading strategy to find equilibrium. We teach how to trade shooting stars on our live daily streams. Check out our trading service to learn more.
Patterns Within Patterns
Shooting star patterns are daily candlestick patterns. It’s important to see what other pattern it’s a part of. That can tell you when to get out.
We know they can trap buyers causing them to take a loss. If you’re only trading certain moves without look at the overall picture, that could be you.
Look for head and shoulders patterns or inverted cup and handle patterns. Even double or triple top patterns. See the pattern within the bigger patterns. Take our free stock online courses.