Shooting Star Candlestick Pattern Trading Guide

The shooting star candlestick pattern signals a potential bearish reversal during an uptrend. You’ll recognize it by its small real body, long upper wick, and little to no lower wick – the open/close prices lie near the session’s low.

Confirm its importance through indicators like bearish divergences in RSI or MACD, volume analysis, and its placement relative to resistance. You can add it into strategies using overbought signals like RSI, setting stops above the high, and targets at support/Fib levels. Proper risk management through position sizing and stop-losses proves essential.

Download your free 50 EMA Trading Strategy For Any Instrument: Click Here.

Main Points

• The shooting star candlestick pattern is a bearish reversal signal that can help traders identify potential trend changes.
• It forms when a security opens, advances significantly, but then closes near the open, creating a long upper shadow and a small real body.
• This pattern is most significant when it appears after an uptrend, indicating that buyers are losing momentum.
• Traders use the shooting star pattern as part of their technical analysis and candlestick charting strategies to spot trading signals and manage risk.
• The absence of a lower shadow is a key characteristic, suggesting a lack of selling pressure during the trading session.

What Does A Shooting Star Candlestick Mean?

This pattern highlights a market where during the period represented by the candlestick, buyers were strong enough to push prices higher.

• Sometime during the period represented, selling pressure was strong enough to overwhelm the buyers and drive prices lower.
• Sellers were able to hold prices near the lows and while the price may close lower than the open, the price can close higher than the open.

Imagine the price is in an uptrend and you see the appearance of the shooting star.  On a lower time frame, you are seeing a complete down-trending price structure of lower highs and lows.

In your current time frame, you are seeing sellers take out the buyers and the potential of a change of trend or in the short term, direction.

The long upper wick can be hard on the psychology of long traders.

1. Buyers are enjoying the profits they gained during the uptrend
2. The long upper shadow shows a flurry of selling activity stepping into the market
3. Closing on the lows incites fear in those holding long positions
4. With those with a bearish view of the market and buyers selling to exit, we can see a sharp drop in price

The key is that we need to see a market that is in a mature uptrend.

Trading The Shooting Star Pattern

Considering that this pattern is bearish, we are looking to short when it appears.

But we don’t want to short every time it appears on the chart.  These candlesticks can show up in random locations on the chart.

The price was in an uptrend and we had a break of a trend line which indicates the uptrend is still intact.  If you would have shorted with the appearance of a reversal candlestick, you’d have a losing trade.

The shooting star candlestick is a bearish reversal candlestick just like any other.

Take a look at these reversal candlesticks:

All we are seeing is an indication of who is in control of the market at that point that shows a potential price reversal.

You can see strong momentum down with the Marubozu, a lack of further upside with the Descending Hawk, and a wipeout of buyers with the 3 outside down pattern.

You can use the same trading strategy to trade any reversal candlesticks, including the Shooting Star candle.

Trading Strategy For Reversal Candlesticks

This strategy is purely technical analysis based on the shooting star pattern:

1. Look for a trending market.  You can use a trading indicator like the 50-period moving average or use higher highs and lows to show an uptrend.
2. Price enters an area where you may expect a reaction
3. Look for a reversal candlestick such as the Shooting Star

This example takes into account a breakout plus the ending of an A-B=C-D price move.

1. Price is trending upwards as noted by higher highs and lows

2. Price breaks out of a prior resistance area with momentum

3. We see the Shooting Star candle appear after a strong momentum breakout.  We are also at the “D” of A-B=C-D price move

4. Traders that were long into the breakout and those that went long at the breakout, see sellers step in.

5. Price collapses with an eventual 14% drop in price

How To Improve The Strategy

While traders will talk about support and resistance levels, the key is knowing if the levels you choose have any meaning. Sticking to the obvious turning points you can see on the chart is the best bet when looking for levels.

When trading a reversal, we want to have a reason to think of a reversal.

Think of strong momentum to the upside in price.  Traders are feeling good as they see a strong price movement to carry their trade to profits.

A slight pullback is normal and the longs sit through the slow drift.

When the price drives back up and they see the Shooting Star pattern, what are they thinking?

Looking at this, what would you be thinking as someone holding longs? It is probably the time to either exit the trades or be aggressive with your stops.

I use this candlestick as part of my failure test strategy.

Incorporating a momentum measure either by viewing candlesticks or a trading indicator such as the RSI can add another level to the probability of trading reversals. This can assist you in seeing if the price is losing momentum to the upside.

Risk Management

Proper risk management strategies are essential when trading the shooting star candlestick pattern. You must have a solid plan to control your risk exposure and protect your capital. Position sizing and money management are vital components of a successful risk management approach.

One technique is to use a fixed risk percentage for each trade. For example, you could risk no more than 1-2% of your account balance on a single trade. This way, even if the trade goes against you, the potential loss is limited and manageable. Additionally, you can use stop-loss orders to automatically exit a position if it reaches a predetermined level of loss.

Here’s a table illustrating different risk percentages and the corresponding number of trades required to recover from a drawdown:

As you can see, the higher the risk percentage, the fewer trades are needed to recover from a significant drawdown. However, this also increases the potential for larger losses. Striking the right balance between risk and reward is essential for long-term success.

Setting Your Stop Loss

Traders can use the price pattern itself by setting their stop loss above the turning point.

Using the ATR as your stop-loss is also viable.  Traders will have to decide if the break of the pivot high will be enough for them to believe the setup failed.

While the ATR can give you some wiggle room and takes into account market volatility, a trader has to know what their psychological limits are when the price goes against them.

Frequently Asked Questions

What Is the Historical Success Rate of This Pattern?

There isn’t a definitive success rate, as it depends on the empirical data study and statistical analysis performed.

However, quantitative analyses tend to show this pattern has a moderate success rate, around 50-60%, in predicting reversals.

Factors like market conditions, timeframes, and other technical indicators should be considered for a more impartial assessment.

Can This Pattern Be Used for Other Asset Classes?

You can use candlestick patterns like the shooting star in forex trading and for analyzing cryptocurrency price action. When conducting quantitative analysis, these patterns provide impartial technical signals across various asset classes. However, their predictive accuracy may vary.

Backtesting on historical data for specific markets is advised to assess their applicability and reliability objectively.

How Reliable Is This Pattern During Volatile Market Conditions?

During market turbulence, pattern reliability depends on trader experience.

Technical indicators’ predictive power diminishes as volatility increases.

You’ll need quantitative analysis factoring volatility measures to gauge reliability.

A skilled trader can still profit from patterns by adjusting position sizing and risk management.

However, an impartial assessment shows higher failure rates in volatile conditions.

Are There Any Specific Time Frames More Suitable for This Pattern?

The ideal durations and time frame suitability for reliable pattern analysis can vary. Higher time frames like 4-hour or daily charts often provide more reliable signals, as shorter time frames are susceptible to noise.

However, you should conduct thorough backtesting across multiple time frames to determine the most suitable parameters for your trading strategy.

What Are the Common Pitfalls to Avoid When Trading This Pattern?

When trading any candlestick pattern, you’ll want to avoid an early exit on a false signal. Confirm the pattern by waiting for the next candle’s close. Validate with other technical indicators like volume and support/resistance levels.

Don’t blindly trust a single pattern; apply quantitative analysis and risk management principles.

Conclusion

The shooting star pattern is a key tool. It helps to see when markets might change or people’s feelings about them shift. Learning how it looks and what it means can help you spot appropriate times to enter and leave the market. But remember, it’s not advised to depend only on this pattern. Mixing it with other ways of looking at the market, like technical and fundamental analysis, plus being smart about risk, can make it even better.

This pattern is great for noticing when prices might fall after rising. It looks unique on the charts, with a long top shadow, a small body, and a very tiny bottom shadow. Looking at these features can tell you a lot about what the market might do next. It’s your clue to adjust your plans quickly.

While the shooting star is a strong signal, remember no tool is perfect in trading. Combining technical analysis with solid research, good risk rules, and a disciplined trade plan is the way to go. This mix can help you catch market trends well and stay successful over time. Being good at using the shooting star can show that you know what you’re doing in the markets, leading to better profits.