Charts that encloses data from multiple time frames into a single price bar and used by traders to get a sense of future price moves are called candlestick charts. A shooting star is a bearish candlestick which appears after an uptrend. It indicates that the price may start to fall and occurs only after an advance.
A candlestick is considered to be a shooting star when the pattern appears during a price advance. Besides, the distance between the intra-day high and opening price must be more than double the size of the shooting star’s body. Additionally, the real body should not have any shadow below it.
How to interpret a shooting star ?
A shooting star’s occurrence on the technical charts is a sign that a security’s price has reached a top and a reversal is around the corner. A shooting star candle is best when it forms after three or more consecutive rising candles with higher highs. Its occurrence is possible during a period of over all rising prices with few bearish candles.
After the advance, a shooting star opens and moves higher during the session. This is indicative of buying pressure seen earlier. As the session proceeds, the seller steps in and causes the price to fall back to what it was at open, thereby erasing the gains made in the session. The long upper shadow depicts the buyers who purchased during the session but now are in a losing position as the price falls back to the levels at open.
Traders must know that the candle that forms after the shooting star is a confirmation of the shooting star candle.
The next candle’s high must stay below the high of the shooting start and then move to end below the close of the shooting star. The ideal formation is when the candle after the shooting star gaps lower or opens near the previous close and then ebbs lower on heavy volumes.
A down day following a shooting star appearance confirms the price reversal. This indicates that the prices could continue to fall, where traders may look to sell. Even if prices rise after a shooting star, its price range may act as a resistance.
Difference Between the Shooting Star and the Inverted Hammer
The inverted hammer and the shooting star resemble each other. Both have long upper shadows. Small real bodies near the low of the candle and almost no lower shadow are other commonalities between the two patterns.
The difference is that the shooting star occurs after a price rise and the inverted hammer occurs after a price fall.
Limitations of the Shooting Star
The prices tend to gyrate very often. Therefore one candle is not very significant during an uptrend. Bears in charge for part of one period like in a shooting star may not be significant at all, which is why a confirmation is required.
It has also seen that after a brief decline the prices keep advancing in line with the long term upmove. One way to limit risk is to utilize stop losses when using candlesticks.
It must be noted that a candlestick pattern may be more significant when it occurs near a level that is considered important by other forms of technical analysis.
The shooting star pattern is considered a good tool owing to its simplicity. Spotting this pattern is straight forward. However, the appearance of a candle by itself is flawed. If it appears near a resistance level, the shooting star acts as a confirmation.
A shooting star candlestick is a bearish formation as the price rises during the session but pushed down by the bears back to the opening price. Traders are mostly concerned about the next candle following the shooting start. A price decline during the next period may trigger a sell call while a price rise after the shooting star may mean that the formation is a false signal or the candle is making a resistance area around the price range of the cande.
It must also be noted that the charts are indications and may not always follow an actual price move.