Shooting Star Candlestick Pattern – Strengths And Trading Ideas

Shooting Star Candlestick Pattern: Technical analysis is utilized by investors to estimate the movements of stock prices based on past trends. One of the most popular methods of analysis is the candlestick pattern, which examines the shape and color of individual candlesticks formed due to movement in price to identify past reactions and predict future movements in the stock price.

This approach is critical for making well-informed decisions when it comes to investing in the stock market. The following article will delve into the shooting star candlestick pattern, which is one example of such a pattern.

Shooting Star Candlestick Pattern – Definition

The Shooting Star Candlestick Pattern is one of the most frequently appearing single candlestick patterns which gives a bearish reversal indication. This pattern is preferable to be formed at the top of an uptrend and indicates a potential bearish reversal.

The candlestick comprises a long upper wick, a small body, and little to no lower wick. Here, the upper wick must be at least twice the length of the real body. 

As this pattern indicates a bearish reversal, market participants holding that security where this pattern is formed can square off their positions. Market participants can also look for shorting opportunities as this pattern indicates a potential bearish momentum.

Shooting Star Candlestick Pattern – Meaning

The prior trend before the formation of this pattern needs to be an uptrend. The formation of this pattern indicates a potential end of the uptrend and hence the price might see a downward momentum. 

The candle has a small body as the price closes near the open price. It also has little to no lower wick as the price also closes near its low price. If the price closes above the open price then it will form a green candle and if it closes below it will form a red candle.

The color of the candlestick doesn’t have an impact on its indication because the bearish reversal indication is derived from the long upper wick with a small body and little to no lower wick.

Shooting Star Candlestick Pattern – Psychology

When the price of the security is in an uptrend, there is more buying pressure in the market. During the formation of the shooting star candlestick pattern, the price of the security goes up from its open price but there is a sudden increase in the selling pressure. Due to this the price comes down and closes near the open price.

The long upper wick is the result of strong selling from the high price and this indicates a weakness in the buying pressure. Hence, this weakness in buying pressure is an indication that brings in more sellers, and that is why there is a probability of the price going down.

Shooting Star Candlestick Pattern – Strengths

There are a few situations where the formation of the shooting star candlestick pattern gives a stronger bearish reversal indication. 

• Formation near a resistance zone: The formation of this pattern near a resistance level indicates a strong reversal as traders usually square off their existing positions or enter short positions near these zones, and the emergence of this pattern might attract further sellers.

• Formation when the price is at an all-time high: It is also a strong indication that the price may fall for a short period or enter a downward trend. This is because market players are often nervous when the price is at an all-time high, and they consider abandoning the trade by taking the profits already earned. This feeling is produced when this pattern appears when the price is at an all-time high.

• Formation with the RSI also being in an overbought zone: This is a strong indication because the RSI is in an overbought zone (over 70), and the formation of this pattern attracts more sellers into the market. As a result, the price may trend downward.

Also read…

Shooting Star Candlestick Pattern – Trading Ideas

Traders must ensure that the prior trend before the formation of this pattern is an uptrend. Once this pattern is formed in an uptrend, the following are the guidelines to take a trade:

• ENTRY: When the price of the security goes below the low price of the shooting star candlestick pattern then traders can take a sell entry.
• TARGET: Traders can exit the trade when the price of the security reaches near the immediate support zone. Once this level is reached, they can also book partial profits in the trade and hold on to the remaining position until the next support level.
• STOP LOSS: Traders can place the stop loss near the high price of the shooting star candlestick pattern. 

Combining Shooting Star Candlestick Pattern with RSI Indicator

Market players can combine candlestick patterns with indicators to gain a more accurate prediction of future price movement. Combining the shooting star candlestick pattern with RSI provides an even greater indication of negative momentum.

When this pattern appears in the market and the RSI is also in an overbought zone, it is a more reliable indicator of future downward movement in security. Market participants can therefore combine these two to gain a more accurate impression.

Shooting Star Candlestick Pattern – Example

In the above chart of STATE BANK OF INDIA, the time frame is 45 minutes. The enclosed candlestick is the shooting star candlestick pattern. As we can see the price was in an uptrend and when the Shooting Star Candlestick Pattern was formed, the price saw a downward momentum.

Traders could have taken a sell entry at Rs.583.15 and the stop loss was at Rs. 587.65

Difference Between Shooting Star and Inverted Hammer Candlestick Pattern

Both the shooting star candlestick pattern and the inverted hammer candlestick have a similar appearance. They both have long upper wicks and small real bodies. The difference between the two is that when this type of candlestick appears in an uptrend, it is called the shooting star candlestick pattern, while when it forms in a downtrend, it is known as the inverted hammer candlestick pattern.

Shooting Star Candlestick Pattern – Limitations

When the price is in a significant uptrend, just the formation of one candlestick won’t be able to affect the trend. When the price is in an uptrend, the price may take a small retracement and this retracement can be formed in the market as the shooting star candlestick. But after that, it can continue its upward movement causing the failure of the indication provided by the formation of this pattern.

Key Takeaways of the Shooting Star Candlestick Pattern 

• For this pattern to be valid, the prior trend must have been an uptrend.
• The candlestick that forms this pattern consists of a long upper wick, a small real body, and little to no lower wick.
• The color of the candle is not important and can be either green or red.
• This pattern indicates a bearish reversal.

Read more: High wave candlestick pattern

Conclusion

The shooting star candlestick pattern, which is frequently seen in the financial market, is examined in this article. It identifies the specific requirements that must be met for a candlestick to be classified as a shooting star candlestick pattern. Traders can study this pattern to gain insights into market behavior and make informed trading decisions.

Understanding this pattern can help market participants make better decisions when trading. What are your views about this article? please let us know in the comment section.

Written by Praneeth Kadagi

By utilizing the stock screener, stock heatmap, portfolio backtesting, and stock compare tool on the Trade Brains portal, investors gain access to comprehensive tools that enable them to identify the best stocks, also get updated with stock market news, and make well-informed investments.

---

Start Your Stock Market Journey Today!

Want to learn Stock Market trading and Investing? Make sure to check out exclusive Stock Market courses by FinGrad, the learning initiative by Trade Brains. You can enroll in FREE courses and webinars available on FinGrad today and get ahead in your trading career. Join now!!