Shooting Star Candlestick Pattern: Know Its Meaning, how to find it & Its Benefits.

What is the Shooting Star Candlestick Pattern?

A shooting star in the stock market refers to a single candlestick pattern that indicates a potential trend reversal from bullish to bearish in technical analysis.

It is formed in an uptrend when prices open near the low and rally higher on intraday. However, the rally fizzles out and prices close lower near the open. This forms the 'star' shape body in the stock chart. You can check this trend through your trading account.

You can observe the candle has a long upper shadow indicating the failed intraday rally. The body color is not important, but green or white bodies indicate stronger selling pressure. A shooting star indicates the market tested higher levels but now it can face strong resistance and selling pressure. Traders typically go short or close long positions when this pattern emerges after an uptrend.

Breakdown of Shooting Star Candlestick Pattern

As outlined earlier for shooting candlestick patterns, a shooting star is a bearish reversal pattern which signals potential change in the price direction. The uptrend in the chart is nearing its end as the momentum is weakening, and the sellers in the trade are feeling more confident that they can force a reversal in price action.

• A shooting star candlestick pattern can be quite a powerful formation. Its shape reflect the pattern a lot of attention as the wick always sticks out from the rest of the price action in the chart.

• This scenario occurs in the stock market especially the case when the wick of a shooting star is also the new short-term high.

• Result for this end of trend is that although the buyers were successful in pushing for a new high, they failed to force a close near the session’s high. Their inability is now a chance for the sellers to reverse the price action and then erase previous gains.

Therefore, the shooting star’s key strength can be the ability to generate a reversal signal. Of course, it may not always be right, but it is considered to be effective and reliable for stock traders. However, do note that this is still one signal generated by one of hundreds of technical indicators, you can explore different charts on your stock trading account.

How To Spot Shooting Star Candlestick Patterns?

Before you navigate the shooting star pattern you must know some of the things about candlestick.

1. Upper Tail The Upper tail is also called shadow. It is the line which appears above the candlestick body

2. Lower Tail The lower tail is the line or lower shadow extending below the candlestick body. You can seek that it is either non-existent or is too short

3. Candlestick Body The candlestick body is an indicator of the stock’s opening and closing prices. It can be seen very short in the shooting star pattern indicating that the opening and closing prices are very close to each other.

To Spot a shooting star candlestick pattern, you need to look for an uptrend.

• The candle should have a small real body near the lows and long upper shadow that is at least 2 times the body length. The lower shadow of candlestick is small or absent.
• The body can be empty or filled with green/white color. Red/black bodies imply weakening bullish momentum. There should be a significant push up intraday as indicated by the upper shadow but prices should close near the low.
• Now the upper shadow represents supply and selling pressure emerging in the market. It should mark a failed intraday rally of a stock.
• You need to look for increased volume on the shooting star candle for confirmation of emerging bearish sentiment.
• Observing the next 1-2 candles closing below the shooting star real body validates the pattern further.
• Shooting stars form most often at resistance levels or after a parabolic advance when upside exhaustion sets in the stock pattern. You can also use other indicators like a bearish divergence in RSI to increase robustness of the pattern.

Difference Between a Shooting Star & Inverted Hammer

You can understand the difference between the shooting star candlestick & inverted hammer pattern in the following table:

To summarize, shooting star and inverted hammer imply opposite signals, with shooting star indicating bearish reversal after uptrend and inverted hammer indicating bullish reversal after downtrend.

Benefits of Shooting Star Pattern

The shooting star candlestick pattern has some key benefits for traders:

Act as an Reversal indicator The shooting star acts as a leading indicator of a potential trend reversal from bullish to bearish. It forms after an advance and signals waning upside momentum and emerging downside pressure.

Risk Management The long upper shadow of the shooting star provides a clear zone for placing stop loss above its high. Traders can set targets at the low of the candle or near support levels. This allows favorable risk-reward trades

Trading Opportunities Shooting stars create trading opportunities for bears to enter short positions and bulls to book profits on longs. It offers high probability shorting opportunities with proper risk management after an uptrend in the share price.

Therefore , you can say that the shooting star candlestick gives traders a high probability setup to capitalize on trend reversals at attractive risk-reward propositions. It provides an edge for timing entries and exits online trading accounts.

Limitation of Shooting Star Candlestick

Some of the drawbacks for the shooting star candlestick pattern is as follows:

• As It is a single candle pattern so requires confirmation from subsequent price action for improving robustness of the signal.
• It may form during market consolidations and which may not necessarily lead to trend reversals. Traders must assess momentum and support-resistance levels.
• The stop loss above the shooting star is quite wide. A narrow stop risks premature exit but a wide stop risks larger losses if triggered. In the illiquid markets, the long wick may be a result of low volumes rather than strong rejection of higher prices.
• Although it's a powerful pattern, If the pattern fails and if prices continue climbing after its formation resulting in stop loss triggers.

Conclusion

The shooting star pattern in the stock market is a pattern based on a single-candle stick which indicates a reversal or bearish trend. It has a long shadow which shoots higher, while the open, low and the close are near the bottom of the candle. You can consider the shooting star pattern as one of the useful and effective trading strategies. Traders can analyze the situation and grab the trading opportunities. You can explore stock trading strategies from Kotak Securities.