A Shooting Star is a single candle Japanese Candlestick pattern that is formed in price charts. The pattern is a BEARISH candlestick pattern and is independently tradeable. It provides the forex traders with the best entry point, stop loss and take profit points. Moreover, the pattern is easy to identify and is suitable for new and advanced forex traders. The pattern is a part of the hammer pattern group and is similar to the inverted hammer pattern. The pattern occurs frequently in all intraday charts and daily, weekly, and monthly price charts.
Chart pattern analysis is an integral part of any forex trading strategy. Candlestick chart patterns and candlestick patterns are highly recognized and respected by technical analysts. Forex traders can study these patterns and become proficient in technical analysis after spending time practicing to identify and trade the pattern. Moreover, the pattern is reliable and has a set of rules that define the pattern. As a result, it helps forex traders to eliminate fear and trade with confidence.
The shooting star candle or doji is formed during an uptrend. In an uptrend, the prices are pushed higher by the Bulls or the Buyers as the price progresses higher significantly. However, at one point the price gets rejected and fails to move further higher, instead falls and closes below the opening price. The candle hence formed will have a long upper wick, no or very small lower wick, a small real body, with the closing price lower than the opening price. The length of the upper wick must be twice that of the real body.
The size of the wick with regard to the real body visually represents the failure of the Buyers and the success of the Bears or the Sellers. So the size of the wick is very important for validation of this candlestick pattern. The shooting star candle pattern appears on the top of an uptrend and indicates a potential reversal of the market trend. So traders should prepare to take a SELL position once this BEARISH pattern is identified.
To validate a shooting star candlestick pattern, there should be an established existing uptrend in place. That shows the market is in an uptrend and the Bulls are in control of the market. The size of the upper wick must be twice longer than the real body and an absence of a lower wick or the presence of a small lower wick, are both indicators of a Bearish trend.
The longer upper wick indicates the market trying to find the next resistance level. The Bulls were able to push the prices higher only to find a resistance where bears entered the market. The price action prompted the Bulls to exit the positions partially or completely since the resistance is identified.
On the other hand, bears waiting on the sidelines identified the resistance and the subsequent unwinding of the long positions and started to enter the market. This prompted more bears to join the action and eventually overpower the Bulls. However, if the gap between the opening price and the low price of that candle is higher, it signifies that the bears were completely in control and were successful in grabbing the price advance completely from the Bulls and also able to take it lower than the opening price. Such a candle is considered and a strong bearish candle in technical analysis and forex patterns analysis.
As discussed earlier, the shooting star candlestick pattern is a Bearish price reversal pattern and is tradeable as an independent pattern.
The below image shows the Entry, Stop Loss, and Take profit points that will be discussed in detail further.
The foremost important criteria is the presence of an established uptrend and the Bulls should be clearly in control of the market. This can be easily verified and identified by the trader, however, for further clarification there must be at least more than 3 BULL candles in the uptrend prior to the formation of the shooting star candle.
The shooting star candle should have a wick at least twice the length of the real body. The real body should have lower closing. Aggressive traders can enter the market with a SELL position immediately; however other traders may wait for the opening of the next candle. The price may not immediately drop and the sellers may not be able to take control of the market immediately.
Traders should be aware that it is common for prices to get a few pullbacks before the price starts a new trend as trend reversals may take time for traders to assimilate and move ahead. Similarly, once the resistance is identified and the reversal is taking place in the shooting star candle, the next candle may experience fluctuations as there may be a fight between the BULLS and BEARS so the next candle of the shooting star candle is also important.
Traders can wait for the price reaction during this candle, once the price is able to stay below the shooting star candle and if the next candle also gives a lower close, then the market will continue to stay bearish in the subsequent candles. Confirmation of the reversal of the market can be validated using the trading volumes. Volumes play an important part to define heightened market activity. The increased volume levels imply the entry of more sellers and the building up of sell orders, while simultaneously indicating the unwinding of Buy positions and exit of buyers from the market. As a result, trading volumes act as an important confirmation criterion in the candlestick reversal pattern.
The best stop loss is above the wick of the shooting star candle that is also the high of the candle. The high of the candle is the rejection point of the price and from where the price reversed. In other words, the resistance was discovered by the market at this high. So forex traders can place the stop loss above this level. If the price breaches this level, then the resistance will be effectively taken out by the market and the pattern is invalidated, as it implies the Bulls are back in control and there is a strong possibility that the Buyers may take further control of the price trend.
The pattern provides clear levels for the calculation of the take profit. The take profit is generally three times the length of the shooting star candle. So traders can measure the length of the pattern candle from the low to the high price, which includes the candle wick and real body. The pattern generally provides results on that level; however, traders may look for early exit according to the price action. The pattern unfolds pretty quickly once the bears take action and the subsequent bear candles are generally long implying the strength of the bears. Any price exhaustion will be visible and traders can cover partial positions or look to exit completely.
In general, traders tend to enter a SELL position on the candle closing of the shooting star candle, but others wait for the closing of the next candle to confirm the trend direction. However, there is another method to reduce the risk while entering at a bargain price. The candle next to the reversal candle may exhibit pullbacks due to market activity that includes the exit of buyers and entry to sellers. Many traders tend to wait for such pullbacks which may see prices moving as high as half the length of the reversal candle. A SELL entry at this level will provide the trader with a much higher price and also reduce the distance of the stop loss eventually reducing the risk and increasing the profit.
The pattern unfolds pretty quickly once the bears take action and the subsequent bear candles are generally long implying the strength of the bears. Any price exhaustion will be visible and traders can cover partial positions or look to exit completely. It is always in the best interest of forex traders to use additional indicators and tools for confirmation of price reversals. Due to the fact that the reversal included the discovery of resistance and the price had been rejected by the resistance, traders must exercise caution and confirm the reversal before entering a trade.
The above AUDUSD H1 chart shows the Shooting star reversal pattern in action. The price was in an existing uptrend before the formation of the shooting star candle. The candle had a long wick at least twice the size of the real body. The body of the candle is small and closed bearish. All these confirm the pattern. The entry is at the closing of the reversal pattern candle, with the take profit measuring at least 3 times the length of the reversal candle.
In this video, Gil Ben Hur explains about confirmation price action:
The below image shows the difference between the shooting star and the inverted hammer pattern. Both patterns are similar in the construction of the candle. Both are candlestick reversal patterns however the shooting star candle appears during an uptrend and is a Bearish reversal pattern. On the other hand, the Inverted hammer pattern appears during the downtrend and is a BULLISH reversal pattern.
The Shooting Star Candlestick pattern is an important reversal pattern that appears frequently and can be traded successfully. The pattern is easy to identify and can be mastered easily with little effort so it is well suited for new and advanced forex traders. The pattern appears in all chart time frames and can be used to trade all financial markets. Though the pattern provides entry, stop loss, and take-profit levels, traders may use additional confirmation methods by using additional indicators and price action. Most importantly traders must practice to identify and trade the pattern in demo accounts for as long as possible, before trading LIVE.
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