What Is a Shooting Star?
Shooting star is a bearish reversal candlestick that forms after an uptrend. Traders recognize it by its small body and long upper shadow. It is a candlestick based on technical analysis. It forms at a resistance or selling zone.
The shooting star candlestick pattern forms when the market is in an uptrend. At some point, it reaches a selling zone where the price shows selling pressure but still rises. However, by the end of the session, the price closes near its opening price, creating the shooting star formation.
What a Shooting Star will show us
The shooting star candlestick shows that when the price forms a new high, the buyers are unable to close the price near this new high. Sellers confidently push the price lower. And the candlestick closes near its opening price. This causes other sellers to become active and start selling with confidence, leading to the beginning of a new trend in the market.
How to Spot Shooting Star with Resistance Pattern
There are two scenarios for spotting a shooting star candlestick at a resistance level. Best to consider both scenarios together for trading with a shooting star candlestick. It's acceptable if the candlestick is forming at a new high or at a clear resistance level. It is important to understand this to avoid being trapped by formations that occur in incorrect areas and to protect yourself as a trader.
1st Scenario:
When the price directly reaches a clear resistance level, a shooting star's shadow will touch the resistance level and form. This provides a direct and clear signal for selling, and traders trade with confidence. Look at this image to better understand how it looks.
2nd Scenario:
Here, it often happens that a resistance level forms at a psychological number like 100, 150, or 200. After touching this price level, the price shows rejection, and any bearish candlestick may form here, such as a Shooting star, Hanging man, tweezer top, and others. If a shooting star has formed, after some time you'll see a confirmation candlestick, where you can take entry into the trade.
Formation of Shooting Star
The formation of a shooting star happens when the price has risen so high that people in long positions start making profits, leading to profit booking, and the price shows rejection. This can also happen when the price is near a psychological number. In this, after the candlestick opens, the price moves up, but by the time it closes, it comes back near its opening price, forming a shooting star candlestick.
How Can You Trade the Shooting Star?
To trade with a shooting star, you need to pay attention to a few things, such as the place of formation and how well the candlestick has formed. The color of the candlestick doesn't matter much, but if a red shooting star forms, it's an advantage, nothing more. Now, if the formation place is correct and the candlestick is well-formed, let's understand how to trade with it.
Entry:
Entry in this candlestick should not be made right when it forms. You should enter the trade once the candlestick is fully formed and the next candlestick shows bearish momentum. You can enter the trade when the next candlestick breaks below the low of the shooting star, or if the next candlestick closes below the low of the shooting star. The choice is yours.
Stop Loss:
For the stop loss, you can simply set it above the high of the candlestick. Sometimes, even after breaking the high, the market may still go down. For this, you need to backtest the candlestick to understand its movement better.
Target:
There is no fixed target with this types of candlestick, so you can set multiple targets and book partial profits gradually. You can book all your profits at one target or distribute them across different targets.
What does Red Shooting Star indicate?
A red shooting star candlestick shows that there are very few buyers, and the sellers are more active. Now, understand this: If you want to sell, which color of candlestick would you prefer? Red color, because it shows selling and, psychologically, it gives confidence to sellers. So, a red shooting star candlestick gives sellers confidence. However, if you want to trade with this candlestick, you need to wait for the next candlestick for confirmation.
What does Green Shooting Star tell?
A green shooting star candlestick indicates that buyers are still active. Simply put, if the candlestick is green, it means buyers are active. However, when you look at the shadows, you'll see that sellers are more active than buyers in this candlestick. That's why I said you should enter the trade with this candlestick only when the next candlestick gives you an entry signal, which will happen if it breaks below the low of the shooting star.
Example of How to Use the Shooting Star
Trading should always be done with proper backtesting; never trade a strategy without it. That’s why I’m providing some examples of the shooting star so you can see how to trade with this candlestick.
If you look at these images, it might seem like this candlestick only brings profit, but when you keep trading, it won't be like that. At that time, your trading psychology will give you many signals, telling you to exit and avoid losses. That's why it's very important to correct your trading psychology. You can read this because it talks about this topic in detail.
Benefits of Using Shooting Star Candlestick Pattern
There are some good benefits of trading with the shooting star candlestick that are important to know so that you can start trading with this candlestick.
- First, it's a single candlestick pattern, meaning it only needs one candlestick to form. That's why it can easily form, and there are higher chances of it appearing.
- Unlike other candlestick patterns where 2 or 3 candlesticks are needed to form something, like the Tweezer Top or Evening Star.
- Second, it's easy to spot due to its long upper shadow and small body.
- Third, the color of this candlestick doesn't matter much because the entry and exit will be based on the next candlestick.
- The shooting star candlestick is a strong reversal candlestick, and it can provide significant targets in trading.
Limitations of Shooting Star
Just like there are benefits, every candlestick pattern has some limitations as well, and it's important to understand those too.
- First, just the formation of a shooting star does not guarantee the start of a bearish trend. You need to wait for the next candlestick to confirm it.
- If the candlestick formation is incorrect, the market might remain in an uptrend.
- Sometimes, even after a shooting star pattern is broken, it can still provide targets.
- To avoid this, you'll need to backtest this candlestick pattern.
Quick tips on Shooting Star Candlestick
- The shooting star is a bearish candlestick.
- It has a long upper shadow that is typically twice the length of its body.
- In this candlestick, the color doesn’t matter.
- This candlestick forms at the end of an uptrend.
- The shooting star candlestick often forms at a psychological number or in a selling zone.
- Whether the shooting star candlestick will work or not is determined by the candlestick that follows it.
- The entry for this candlestick is determined by the next candlestick. If the next candlestick breaks the low of the shooting star, then you consider entering.
- The target 1 for this candlestick is typically equal to its size.
- The stop-loss for the shooting star is placed if its high is broken.
- Traders often find this candlestick quite reliable.
Conclusion on Shooting Star Candlestick
That’s all about the shooting star candlestick. Yes, it would be correct to say that just because this candlestick forms, you shouldn’t decide that the market will definitely go down. There are many other factors for confirmation, and you should use additional indicators as well.
You can use different timeframes for confirmation. Traders recognize this candlestick by its small body and long upper shadow.
Lastly, I would say best of luck to all the new traders.
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