Shooting Star Candlestick Pattern – Strengths and Trading Ideas
Shooting Star Candlestick Pattern: Technical analysis is utilized by investors to estimate stock price movements based on past trends. One of the most widely used analysis methods is candle patterns, which examines the shape and color of individual candles formed due to price movements to determine past reactions and predict future stock movements.
This approach is critical to making informed decisions when investing in the stock market. In the next article, we will take a closer look at one example of such a pattern: the shooting star candlestick pattern.
Shooting Star Candlestick Pattern – Definition
The Shooting Star candlestick pattern is one of the most frequently occurring single candlestick patterns that provides a bearish reversal signal. This pattern is desirable to form at the top of an uptrend and indicates a potential bearish reversal.
A candlestick consists of a long upper wick, a smaller body, and a lower wick. Here the upper wick should be at least twice the actual body length.
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Since this pattern indicates a bearish reversal, market participants who hold securities in which this pattern is formed may liquidate their positions. Market participants may also look for selling opportunities because this pattern signals potential bearish momentum.
Shooting Star Candlestick Pattern – Meaning
The prior trend before this pattern is formed must be an uptrend. When this pattern forms, the price may show downward momentum as it means that the uptrend is likely to end.
The body of the candle is small as the price closes near the open. The price also closes near the minimum, so there is little to no lower wick. A green candle is formed when the price closes above the opening, and a red candle is formed when the price closes below the opening.
The bearish reversal indicator is derived from a long top wick with a small body and little or no bottom wick, so the color of the candlestick does not affect the indicator.
Shooting Star Candlestick Pattern – Psychology
When the price of a security is trending upward, there is more buying pressure in the market. During a shooting star candlestick pattern, the price of the security rises above its opening price, but selling pressure increases rapidly. This causes the price to fall and close near the open price.
Long upper wicks are the result of strong selling at higher prices, indicating weak buying pressure. Therefore, this weakening of buying pressure is a sign of more sellers coming in, which is why the price is likely to fall.
Shooting Star Candlestick Pattern – Strengths
There are several situations where the formation of a shooting star candlestick pattern provides a stronger bearish reversal signal.
- Formation near resistance zone: The formation of this pattern near resistance signals a strong reversal as traders typically close existing positions or enter short positions near this area, and the emergence of this pattern can attract more sellers.
- Formation when the price is at an all-time high: It is also a strong signal that prices may decline in the short term or enter a downward trend. This is because market participants often get nervous when prices reach all-time highs and consider abandoning the trade, taking the profits they have already made. This feeling occurs when this pattern appears when the price is at an all-time high.
- Formation where RSI is in overbought territory: This is a strong indication because the RSI is in overbought territory (above 70) and when this pattern forms, more sellers enter the market. As a result, prices may trend downward.
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Shooting Star Candlestick Pattern – Trading Ideas
Traders must ensure that the previous trend before this pattern was formed was an uptrend. If this pattern forms in an uptrend, here are some guidelines for trading:
- entry: If the price of a security falls below the low price of the shooting star candlestick pattern, traders can make a sell entry.
- Target: Traders can exit a trade when the security’s price reaches near an immediate support zone. Once this level is reached, you can also book a partial profit on the trade and hold the remaining position until the next support level.
- Stop Loss: Traders can set a stop loss near the high price of the shooting star candlestick pattern.
Combining Shooting Star Candlestick Pattern with RSI Indicator
By combining candlestick patterns and indicators, market participants can obtain more accurate predictions of future price movements. If you combine Shooting Star candlestick pattern RSI can be used to better indicate negative momentum.
If this pattern appears in the market and RSI is also in overbought territory, it is a more reliable indicator of future downward movement in the security. Therefore, market participants can combine the two to get a more accurate impression.
Shooting Star Candlestick Pattern – Example
In the STATE BANK OF INDIA chart above, the time span is 45 minutes. The enclosed candlestick is a shooting star candlestick pattern. As you can see, the price was in an upward trend and when the shooting star candlestick pattern was formed, the price was trending downward.
The trader was able to enter a sell entry at Rs.583.15 and the stop loss was at Rs. 587.65
Difference Between Shooting Star and Inverted Hammer Candlestick Patterns
Both shooting star candlestick patterns and inverted hammer candlesticks have similar shapes. Both have a long upper wick and a small physical body. The difference between the two is that when this type of candlestick appears in an uptrend it is called a shooting star candlestick pattern and when it appears in a downtrend it is called an inverted hammer candlestick pattern.
Shooting Star Candlestick Pattern – Limits
When the price is in a significant upward trend, the formation of just one candle is not enough to affect the trend. When the price is in an upward trend, the price may need a slight retracement, which revert Meteor candlesticks can form in the market. However, it may continue to rise thereafter, causing the indication following this pattern formation to fail.
Highlights of the Shooting Star Candlestick Pattern
- For this pattern to be valid, the previous trend must be an uptrend.
- The candlesticks that form this pattern consist of a long upper wick, a smaller actual body, and a lower wick.
- The color of the candle is not important, it can be green or red.
- This pattern indicates a bearish reversal.
Read more: High Wave Candlestick Pattern
conclusion
In this article, we will look at the shooting star candlestick pattern, which is commonly seen in the financial market. It identifies certain requirements that a candlestick must meet to be classified as a shooting star candlestick pattern. Traders can study these patterns to gain insight into market behavior and make informed trading decisions.
Understanding these patterns can help market participants make better decisions when trading. What are your views on this article? Let us know in the comments section.
Written by Praneeth Kadagi
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