There is a wealth of information about how market prices are likely to behave that can be gleaned from candlesticks. Your trade’s opening and closing positions may coincide with these patterns. Learn about a trading candlestick known as a “shooting star,” which is regarded as one of the most reliable signals.
List of Contents
Understanding a Candlestick Chart
Towards the day’s low, a bearish candlestick pattern known as a shooting star appears, characterized by a large upper shadow, a short lower shadow, and a little actual body. It shows up after a rising trend has begun.
A shooting star is a specific sort of candlestick that appears when a security opens, makes substantial gains, and then closes the day near its open price.
Any shooting star candlesticks would have to have formed during an upward trend in price. It’s also essential that the gap between the day high and low be more significant than twice the size of the shooting star’s body. There need to be almost no concealing shadows beneath the actual person.
What Does a Shooting Star Candlestick Look Like?
The ideal shooting star pattern consists of four interconnected pieces. In the following picture, we’ve attempted to depict them.
At point 1, the price is moving sharply upward, signaling the beginning of the shooting star candlestick formation. Traders who are optimistic about the market may face “fear of missing out” if they try to ride the wave.
Investors and traders alike fall prey to the next trending candle. In the early stages of an uptrend, more traders enter the market due to fear of missing out (FOMO). To put it another way, this starts what seems like a substantial bullish candle (point 2).
Once we reach point 3, the upward trend suddenly ends, and the price starts to retrace most of its previous gains.
When the candlestick price returns to its opening level, validating the candle pattern, the candle’s body will be relatively modest, at point 4. Whether the candle body is red, green, black, or white is irrelevant.
A highly lengthy upper shadow, a short or nonexistent lower shadow, and a small actual body close to the day’s bottom are highly significant characteristics of this candle pattern for technical traders. This wick should be somewhat lengthy, usually twice as long as the main body of the pattern.
Identifying a Shooting Star Candlestick
Simply put, the shooting star candlestick is a bullish trap that lures long traders into the uptrend on the expectation of further highs, only to have the market suddenly reverse lower. The effectiveness of this pattern is amplified when it occurs close to other significant price levels of resistance.
An appearance near resistance adds gasoline to the pattern’s power, as traders with FOMO buy into long breakouts in anticipation of the break.
The goal of breakout traders is to drive prices above these resistance levels and cause a short squeeze. But if the breakout fails to continue higher, the selling will step in and push the market back down. When the stop losses of the breakout traders are triggered, the price drops more.
The result is a false breakout to the upside, which leaves a long wick in the direction of the breakout.
So, these are the main things to keep an eye out for in a shooting star candlestick pattern:
- A price trend heading upwards is said to be in an uptrend.
- Quick bearish reversal with a long wick to the upward (usually twice as long as the body)
- Candlestick patterns have a small, single-colored body.
Shooting Star vs. Inverted Hammer
The inverted hammer and shooting star candlestick patterns have some visual similarities. They are the same basic design when considered separately. However, the most distinguishing features of these patterns are the contexts in which they manifest and the results one might anticipate.
The formation of shooting stars follows a prolonged upward trend. In the aftermath of a shooting star’s formation, a downward price correction follows.
But an inverted hammer indicates the end of a downward trend. As the downtrend winds down, buyers make a futile attempt to push prices higher before the market reverses course and drops back down, leaving a long upper wick and a short lower body.
After the completion of the inverted hammer formation with a single candle, the market is expected to rally, thereby establishing a fresh uptrend. Thus proving a reversal pattern to be correct.
While the shooting star and inverted hammer are both comprised of a single candlestick, the difference between the two lies in where the candle was formed concerning the preceding trend.
Shooting Star vs. Hammer Pattern
Contrary technical patterns, such as the shooting star and hammer, have much predictive power. The shooting star candlestick pattern differs significantly from the concave one in that it appears to have a lengthy top shadow (wick) to the upside and a little lower body. The appearance of the shooting star at the top of an uptrend indicates an impending downward correction.
Candlesticks forming a hammer have a long lower shadow and a short top body. When a downturn comes to a close, the hammer pattern often forms, signaling the beginning of a rebound that will carry the market into an uptrend.
Example of How to Use the Shooting Star
For this particular stock, the trend is upward. A shooting star is preceded by a sharp increase in the upward direction. The price action depicted by the shooting star opened higher, moved sideways, and ended close to its opening price. The next day’s trading ended lower, lending credence to the possibility of a price decline. Even though a month passed, the price never recovered to match the shooting star’s high. After the confirmation candle has formed, a trader using this pattern can exit any open long positions.
Limitations of Shooting Star Candlestick
In a significant upswing, a single candle’s movement is not particularly meaningful. Since prices are constantly fluctuating, it’s possible that a brief period of sellers dominating, like in a shooting star, may not amount to much over the long run.
For this reason, verification is essential. Even if the shooting star is confirmed, there is no telling whether or how much the price will fall further. Even if prices drop temporarily, they may eventually recover and rise in keeping with the prevailing trend.
In the event that candlesticks don’t pan out, your risk can be minimized by employing stop losses. Think about using candlesticks in your other forms of analysis as well. If a candlestick pattern appears close to a price level that has been identified as significant through different methods of technical analysis, the significance of the pattern may increase.
Conclusion
A single candlestick forming a shooting star is a reliable indicator of market peaks for major digital currencies. The pattern is popular among traders since it can be seen on any chart with little effort.
The signals from the shooting star pattern can be confirmed by using additional indicators, such as a Fibonacci retracement chart or horizontal and trend line resistance. Despite its utility, the shooting star pattern is not without its drawbacks. Investors would be better served by concentrating on more significant cryptocurrencies, stocks, or instruments across an hour, a day, or a week.
FAQs
Mostly, the ideal time frames for trading using shooting star patterns are short-term, such as 1-hour, 4-hour, and daily charts.
Before you make a trade based on a shooting star pattern, look for a small real body at the bottom of a long upper shadow. This should happen after an uptrend, and the upper shadow should be at least twice as long as the real body. This is a sign that the trend is changing from bullish to bearish.
Absolutely, all financial markets, including FX and stocks, can use shooting star patterns.
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Source: ByBit, Investopedia