Shooting Star Candlestick Pattern - Meaning and Trading Tips

Technical analysis has evolved a lot in the recent era and currently, traders use various tools and systems to determine the price actions of the stocks. Despite these advancements, candlesticks remain a prominent tool used among traders to determine the price action of a security. Among the various candlestick patterns, the Shooting Star Candlestick pattern is one such simple yet important pattern used among the traders. In this article, let us understand what a Shooting Star Candlestick is in trading, its meaning, types, and more. So, let’s get started.

What is a Shooting Star Candle?

A shooting star candle is a bearish candle that comprises a small body, little to no lower wick, and a large upper which is at least twice as large as the body of the pattern. This is a reversal pattern that appears which is preferred to appear an uptrend.

Types of Shooting Star Candlestick Patterns

As you may have noticed, we haven't specified the color of the candle body for the Shooting Star pattern. The simple reason behind this is that the body of the Shooting Star Candlestick Pattern can be either red or green in color. Hence, this pattern can be broadly classified into the following:

1) Red Shooting Star Candlestick

In red shooting star candlestick, the body of the pattern is red because the closing price is lower than the opening price during the session.

2) Green Shooting Star Candlestick

In green shooting star candlestick, the body of the pattern is green because the closing price is higher than the opening price during the session.

Although the color of the pattern is not very relevant while trading using this pattern, it is important to note the red shooting star candle pattern indicates a more potent reversal than the green shooting star pattern due to its price closing lower than the opening price during the session.

What does the Shooting Star Candlestick Pattern Indicate?

As a Shooting Star Candlestick pattern is considered a reversal pattern, its effectiveness increases when it appears after the formation of a few green candles that are pushing the price upward. One should also note that there can also be a few red candle formations before the appearance of this pattern as long as the security is the overall uptrend.

The appearance of the shooting star pattern tells you that the price was moving upwards indicating the same buying pressure seen over the previous trading session. However, as the current trading session progresses, the price is pushed back near the opening price, removing the gains made during the session. This suggests that the buyers may have lost control of the uptrend and reversal may occur.

The formation of the next candle after the shooting star pattern confirms the reversal in the security. That is, the next candle should close below the low of the shooting star pattern. Furthermore, the next candle's high price should not exceed the high of the shooting star pattern.

These conditions create an ideal scenario to trade the shooting star candlestick pattern.

How to Identify a Shooting Star Pattern?

The following are the key points to remember to identify the shooting star pattern:

• Location: For a candlestick pattern to be called a shooting star pattern, it should only appear after an uptrend. If a similar candlestick pattern appears after a downtrend, then that pattern is considered to be an inverted hammer.

• Shape: The pattern should have a small body, an upper twice as large as its body, and little to no upper wick

• Color: The body of the shooting star candle can be red or green in color. However, a red-bodied shooting star pattern indicates greater conviction for reversal as it indicates the price closed lower than the opening price during the session 

How to Trade the Shooting Star Pattern?

As mentioned earlier, one should only trade using this pattern if the prior trend before the pattern formation is an uptrend. Once this basic criteria is met, one can look to trade the shooting star candlestick pattern in the following way.

1) Entry

There are two ways to trade using this pattern. The first approach is you wait for the next candle after the shooting star candlestick to close below it. Following this, one can enter a short position in security.

The second approach is a bit aggressive approach where you do not wait for the next candle to close below the shooting star pattern. Here, you enter a short position as soon as the next candle starts trading below the shooting star.

2) Stoploss

As the high of the shooting star pattern indicates a price where the buyers were rejected, it is considered as the ideal point of stoploss in the security. 

If the security starts moving the high price of the pattern, one can consider closing the position in the trade.

3) Profit Target

As the trade is based on a single candlestick pattern, there is no fixed method to determine the profit target. One can book their profits using the risk-to-reward ratio, the near support level, or even by using the trailing stop loss method.

Best Scenarios for the Shooting Star Pattern

As the shooting star pattern indicates a bearish reversal, its probability of success is likely to increase as it appears near a well-established level of resistance. This is because resistance zones are levels where price rejections have occurred in the past and traders perceive the reversals to happen if the price reaches those levels again

Limitations of Shooting Star Candlestick Pattern

The following are the limitations of the Shooting Star Pattern:

• Single-Candle Pattern: The main limitation of a shooting star candlestick is that it is a single-candle pattern. Thus, its appearance alone cannot indicate a reversal in the security. 

• Minor Retracement: The appearance of this pattern during an uptrend can also suggest a minor retracement followed by which this pattern can continue to move in the upward direction. Thus it is very necessary to place proper risk management strategies while trading using this pattern.   

Conclusion

In conclusion, while the Shooting Star Candlestick pattern can be a valuable tool for identifying potential reversals, it should not be relied on in isolation. Combining this pattern with other technical analysis indicators and implementing solid risk management strategies is essential to mitigate potential losses.

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