Trading the shooting star candlestick pattern
What is a candlestick pattern?
Candlesticks are a common chart type for trading. One of the benefits of candlestick charts is that they clearly show both market price and volume in a way that is easy to interpret and understand.
Technical analysis of these charts reveals patterns and trends that can provide deeper insights. Candlestick patterns – when combined with additional indicators such as Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) – can provide signals that some traders use to guide decision making.
One of these candlestick patterns is called a shooting star.
What is a shooting star candlestick pattern?
A shooting star is a type of candlestick pattern that can appear during a positive price trend. It’s a bearish signal indicating that upward momentum has plateaued, before a possible reversal or retracement.
A shooting star appears only during an uptrend, when an asset’s open, low and close prices are similar. The candle will have a small body, a long upper wick (or shadow), and little or no lower wick.
If you see this pattern during downwards price momentum, it’s more likely an ‘inverted hammer’ pattern instead.
In summary, you can spot a shooting star pattern by looking for the following traits:
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Price is experiencing upwards price momentum.
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Open, low and close are similar or the same price.
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High price is significantly higher than the open and close prices, resulting in long upper wick and a short body, with little to no lower wick.
Shooting star pattern example
Here’s a hypothetical example to illustrate the shooting star pattern.
A company is experiencing positive share price movement after its latest product announcement sparks momentum. On the first day after the announcement, the share price jumps to $110. On day two, it hits $150, and by day five it’s reached a new all-time high of $170.
On day six however, the company’s share price opens at $170 and rises to an intraday high of $194 – before falling back down to $168 at the close.
This creates a long upper wick on the daily candlestick chart, with little to no upper body, and because it occurs during an uptrend, it’s likely a shooting star candlestick pattern.
Using the shooting star pattern in trading
Here are some steps you can take after you spot a shooting star pattern on a candlestick chart.
- Step 1Confirm the signal
- Step 2Determine your entry and exit points
- Step 3Open a short position
- Step 4Follow a risk management strategy
Confirm the signal
Make sure the shooting star pattern is genuine and not a false signal. High volume adds merit to the pattern, whilst a low volume may be less reliable.
Use additional technical indicators such as the relative strength index (RSI) and moving average convergence divergence (MACD) to confirm the shooting star pattern. These indicators can help validate the bearish signal by showing overbought conditions or a shift in momentum.
Check for false signals by examining the market conditions surrounding the shooting star candlestick pattern. The asset must be in an uptrend when the pattern appears, rather than a sideways phase or downtrend.
Use tools like Fibonacci retracements to identify the support and resistance levels – the points that downward and upward trends are likely to stop or reverse – for more confirmation.
Confirm the trend and wait for the next candlestick to fall lower than the shooting star’s close. The subsequent candlestick provides additional validation of the shooting star pattern and a bearish trend to follow.
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Determine your entry and exit points
Once you've confirmed the shooting star pattern, use technical analysis to establish precise entry and exit points for your trade. Identify key support and resistance levels and use them to set your stop-loss and take-profit orders. This approach can help to protect potential gains.
Consider opening a short position
When you’re confident of a valid shooting star pattern and a potential trend reversal, you may consider opening a short position via CFDs. This means taking a position on an asset’s price falling, with the intention of making a profit from this price decline.
*CFD trading is a risky activity and can bring not only profit but also losses.
Follow a risk management strategy
Use robust risk management controls such as stop-loss and take-profit orders to protect your gains and limit exposure to risk.
Stop-losses allow you to automatically close your position at a predefined price to limit losses when the market goes against you. Conversely, take-profit orders automatically close a position at a predefined price to lock in profits when price moves in your favour.
These orders are often set at key support levels identified during analysis. Regularly review and adjust your risk management strategy to adapt to changing market conditions.
