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.
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.
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.
You can understand the difference between the shooting star candlestick & inverted hammer pattern in the following table:
The shooting star pattern forms an uptrend of stock.
The inverted hammer forms in a downtrend.
Shooting star you can observe has a small real body near lows and long upper shadow, which indicates failure to sustain the rally.
In case of Inverted hammer, you can observe it has a small real body near highs and long lower shadow indicating recovery after initial selling. This signals potential trend reversal which is from bearish to bullish.
In short the shooting star upper shadow shows rejection of higher prices
The inverted hammer lower shadow shows rejection of lower prices.
|Shooting Star||Inverted Hammer|
|The shooting star pattern forms an uptrend of stock.||The inverted hammer forms in a downtrend.|
|Shooting star you can observe has a small real body near lows and long upper shadow, which indicates failure to sustain the rally.||In case of Inverted hammer, you can observe it has a small real body near highs and long lower shadow indicating recovery after initial selling. This signals potential trend reversal which is from bearish to bullish.|
|In short the shooting star upper shadow shows rejection of higher prices||The inverted hammer lower shadow shows rejection of lower prices.|
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.
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.
Some of the drawbacks for the shooting star candlestick pattern is as follows:
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.
The shooting star pattern has a reliability of around 70% in predicting trend reversals from bullish to bearish. For best results, you should confirm the trend with the next 1-2 candles before taking trades.
A shooting star pattern can be found in the stock chart after discovering an uptrend that is when the prices open near the lows, rally higher intraday but close near the open forming a 'star' like candle body with a long upper shadow.
You can identify the shooting star from its small real body, long upper shadow at least 2 times the real body length, and a small or no lower shadow. Next, It shows a failed rally attempt indicating potential topping.
A shooting star candlestick indicates emerging downside momentum of a stock which could potentially reverse the prevailing uptrend.
No, a typical shooting star is a bearish reversal pattern. But, an inverted hammer which looks similar to shooting star pattern forms in a downtrend and indicates bullish reversal potential.
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