Candlesticks can give you a clear perspective of the behavior of the bulls and bears in the market. Moreover, a candle chart also gives you an idea of what is going on in the market. Besides, it is only by observing the candlesticks that you devise your trading strategy.
Therefore, if you are in the beginning phase of your stock market journey, it is very important for you to get accustomed to certain candlestick patterns before anything else. The shooting star is one of them.
In this blog, you will not only read about this candlestick pattern but you will also learn how to identify it, what it means, and a lot more. So, let’s start with the basics:
What is a Shooting Star Candlestick Pattern?
Shooting stars are among the most prominent candlesticks among the traders. It is indicative of a bearish reversal pattern in the near future. It is generally formed in special circumstances when a stock opens at normal prices but tends to increase significantly during the day but the price is rejected. This causes the candle to close near the opening price.
Structure of a Shooting Star Candlestick
The structure of a shooting star candlestick is quite similar to that of an inverted hammer. It has the same characteristic features like:
A Small Real Body
The solid part of the candle, which is broader than the above and/or below lines coming out of it, is called the real body of a candlestick. It indicates the opening and closing prices.
Now, the body of a shooting star is quite small because the distance between the opening and closing prices is minimal. Also, it is located near the lowest point of the candle.
A Long Upper Wick
The line coming out on top of a candlestick is called the upper wick or shadow. This shadow signifies the highest point that the price reached up for a particular candle.
When it comes to shooting stars, just like inverted hammers, they also have a longer upper shadow that has to be, at least, double the size of the body.
A Tiny or Non-Existent Lower Shadow
The line coming out from the bottom of a candlestick is called the lower wick or lower shadow. This shadow shows the lowest point when the price of a particular candle receded to.
Again, just like an inverted hammer, the lower shadow of a shooting star is either very tiny or non-existent.
In short, the structure looks like this:
- a small real body
- a long upper wick
- no or a tiny lower wick
Note: A shooting star is most effective if it is formed after three consecutive rising candles with higher highs.
How to Identify a Shooting Star Candlestick?
It is obvious that you will face challenges while identifying this candlestick in the beginning. However, let us assure you that it is quite easy and with a little effort you can also do it.
First of all, the main identifying factors include the structure of the candlestick itself. You have to look for a candle with a small body, a long shadow on the top, and a small or no shadow on the bottom.
Now, even the hammer looks like this! So, how will you distinguish between these two? It is quite simple. Let us explain:
Difference Between the Shooting Star and Inverted Hammer
Even though both the candles look exactly the same, the dissimilarity between the two is identified by their placement on the chart. If a candlestick of this structure appears on the chart after the downtrend, it is called an inverted hammer.
However, when a candlestick of a similar structure appears in the uptrend, it is called a shooting star.
Confirmation Candle
The next candle that appears after the shooting star confirms whether it is reliable or not. You have to note that the high and close of the confirmation candle should be below the high and close of the previous candle. Additionally, it should move downwards with heavy volume.
Read more: 20 Stock market terms for beginners
How are Shooting Stars Formed?
A shooting star forms when there is a significant price advance as the candle opens, but eventually, the prices start to fall and the candle closes near the low. Are you confused? Let us try to explain this phenomenon using a story.
Let us imagine that there is a candle named X. Now, in a chart pattern for a particular stock, X opens and the bulls use their force to push the prices upwards. As a result, the real body of X begins to grow higher and higher.
Seeing this, the bears start selling and the price starts moving downwards. Thus, the body of X also starts becoming smaller, leaving a thin line that shows the total height it has achieved.
The bears succeed to close the candle near the opening prices and therefore, X is left with a very small body and a long upper shadow.
This story shows the exact process that leads to the formation of shooting stars.
Example: What Does the Shooting Star Tell You?
Shooting stars signal the fact that the price has reached its maximum and there is a possibility of a bearish reversal. It is because when the bulls fail to maintain the price, it indicates that the bears have taken over the market and the prices are under their control.
In simple terms, it is an indication that the prices may fall. So, it means, that the candlestick is telling you to sell or enter a short trade.
Advantages of Shooting Star Candlesticks
One of the main benefits of shooting stars is that the pattern is comparatively easy to identify while performing technical analysis, even at extended graphs. In addition, its shape and structure give you a clear idea about what might have happened in the market.
Moreover, if it appears near the resistance level, it becomes even more reliable.
Reference: Best technical analysis indicators
Limitations of Shooting Star Candlesticks
A major disadvantage of this candlestick is that when you consider it in isolation it does not tell you anything about price reversals. Besides, in isolation, there are chances that you might get confused whether it is an inverted hammer or a shooting star.
When you spot this candlestick at the top of an uptrend, it might not always result in a possible reversal. Therefore, it is better not to trust the signals blindly.
Instead, you should use indicators to test the bearish bias. One such indicator is the Fibonacci retracement. What’s more? It can also help you to pinpoint the extent to which the prices will move against the current trend.
Bottom Line
Shooting stars are among the most prominent candlestick patterns that signal towards a downward reversal. While its structure is the same as the inverted hammer, its indication and placement are the quite opposite.
It is important to note that the candle offers strong reversal signals but there are chances that the market does not play out as expected. Therefore, you must consider other tools and indicators before you decide to enter a trade.
If you have any doubts regarding this candlestick or the stock market, feel free to connect with us.
