Introduction
A shooting star is a glowing meteorite through the Earth’s atmosphere… No, we aren’t talking about that shooting star!! As traders, we love chart patterns, whether we’re trading forex, stocks, metals, options, or crypto.
A chartist is a master of anticipating mass psychology, which is what a formation like the shooting star pattern is for. This is a simple-to-spot set-up that appears regularly on all time frames.
Let’s look at the shooting star candle pattern and how it forms in more detail.
(Check out guides on other patterns like the head and shoulders, double top/bottom, flag, triangle and Doji star, respectively).
What is the shooting star pattern?
The shooting star pattern is a bearish candlestick reversal formation where the body is small, the lower shadow (or wick) is tiny, and the upper shadow is noticeably long. It looks almost like a bearish pin bar, except it doesn’t have a ‘nose’ or a slightly bigger lower wick.
A shooting star appears after price has been trending upwards and suggests the market may change into a downtrend.
The most significant part of the bearish shooting star pattern is the long upper wick, which is at least twice as long as the body. The candle will form as it usually does during an uptrend, producing a new high.
But there will be a strong rejection and mounting selling pressure at some point. This causes what was once a full-bodied green candle to have a long wick. Furthermore, the body’s colour will change to red, suggesting the bears will likely take control of the upcoming session.
Many traders wait to see if the next candle is bearish before going short with this set-up. Yet, there are other techniques for confirmation that we’ll soon explore.
The opposite of the shooting star pattern is the inverted hammer. This has the same body structure and formation; it just forms oppositely during a downtrend. Think of it like a ‘bullish shooting star.’
How to trade the shooting star candlestick pattern
We know that a shooting star pattern can form at any time. But merely seeing it doesn’t mean much without confluence (combining two or more factors in your analysis). So, the most essential aspect is where it forms.
Before getting to this concept, the time frame where you see a shooting star candlestick pattern matters greatly.
Of course, the lower the time frame, the more shooting stars you will see, but this doesn’t mean they are worthy of causing a reversal. This is due to ‘noise,’ a concept describing the overload of price action which distorts the underlying momentum or trend.
On the other hand, the higher in time frame you go, the more reliable shooting star patterns become. This is because these charts are less ‘noisy’ and the length of time decreases the chances of false signals. However, the trade-off is that the formation will seldomly appear on your charts.
Nonetheless, let’s look at the different ways of exploiting a shooting star trade.
- Trend lines: It’s common to find the shooting star pattern on a trend line. This happens during a retracement phase as the price moves towards it. The set-up would suggest the correction is over and that the market will move in its previous direction.
- Support and resistance: A trend line is essentially a diagonal version of support and resistance. The traditional support/resistance is horizontal and represents turning points.
Traders look for various price action patterns like the pin bar, spinning tops and, of course, the shooting star pattern. Many reversals stem from these formations on key support and resistance because they are highly anticipated areas on the chart.
- Moving average: This is like an advanced version of a trend line (also referred to as ‘dynamic’ support and resistance). Again, you’ll see shooting stars on moving averages often.
Now that you understand the typical appearances of the shooting star pattern, let’s look at how best to enter the set-up:
- You’ll always want to wait until the candle has formed completely. Some traders will enter before this period. But this can be a mistake and result in a false signal or false shooting star.
Once the pattern has formed, you can enter, with your stop loss at the high point of the shadow.
- The alternative technique is to wait for the price to retrace around midway (50% Fib retracement) of the bearish shooting star. This allows for a better entry, increasing the potential reward of the trade.
Yet, note that the market doesn’t always correct to this point. So, you will miss a few trades with this method.
Chart examples of the shooting star pattern
With all the theory out the way, it’s time to look at real chart examples of shooting star trading. We’ll incorporate everything that we discussed in the last section.
Let’s look at the first example on the 4HR chart of EUR/GBP.
We see the price failed to break a key resistance zone for a few months, as noted by the long wicks. This resulted in a range, and it’s quite usual to find a shooting star pattern appearing in this scenario.
When it eventually did, we see the price retraced to halfway of the candle’s length. This is an example of the alternative entry ‘trick.’ The pair soon went into a downtrend, resulting in a strong reversal worth tens of pips.
Our next example takes us to the daily chart of Bitcoin, where we see the market moving down and respecting the trend line.
Notice the two retracements that ended after the shooting star pattern. This formation would have been a strong signal that the downtrend would resume. Plus, the set-up was more reliable because it formed on a daily chart.
Overall, the shooting star works equally well for traditional reversals and trend continuation.
Our final illustration of the shooting star pattern takes us to the weekly chart of gold (XAU/USD).
We applied a 200-day moving average, which confirmed the downtrend. When the market returned to the indicator, it printed a nice bearing shooting star. As with the trend line example, this would have provided a reversal signal. Eventually, the market moved in a downward fashion from this area.
Conclusion
We should point out there is more to trading shooting stars than seeing them on the chart. Like other patterns, context is key, especially for a one-candle formation. The shooting star is not always a reliable reversal signal.
So, to increase its chances of working out, you should cross-check with other indicators or tools that offer confluence and confirmation.
