In technical analysis spotting a trend reversal is important as it allows a trader to position himself early and maximize his profits. In the charts,few signals are as visually distinct and psychologically powerful as the Shooting star candlestick pattern. It is the market's way of saying that the 'trend might be over'.
In this post, you will learn about Shooting star pattern, a single candle reversal pattern. We are going to move beyond the textbook definitions and will look into its psychology and learn to trade it with confluence of other signals.
Let's start.
What is a Shooting star candlestick pattern?
A Shooting star pattern is a single candle bearish reversal pattern. It consists of a single candlestick that appears at the top of an uptrend.
It tells a specific story that buyers tried to push the price up in an existing uptrend but were overwhelmed by the sellers who were able to bring price down.
How to identify a Shooting star candlestick pattern?
Identification of this pattern is pretty straightforward as it is a single candle pattern. It appears on the top of an uptrend and near a strong resistance level. You can identify a valid sShooting star pattern by noting these three points in a candle-
a) Small real body- The shooting star candle has small real body suggesting price closed near the opening price. The colour of the candle can be red or green, however, a red candle is more bearish than the green one.
b) The long upper wick- This is the most important feature. The upper wick must be at least two to three times the length of the body. The long wick represents the failed rally.
c) Little to no lower wick- ideally there should be no wick hanging below the body of the candle. A small wick is acceptable, but if the lower wick or the shadow becomes longer the pattern loses its power.
The image below shows the Shooting star candlestick pattern.
The psychology behind the Shooting star pattern-
The Shooting star pattern is essentially a bull trap.
Buoyed by an existing uptrend the buyers are aggressive initially and push the price up. Soon the price either hits a resistance level or profit booking starts at the higher level.
With profit booking suddenly there is a lot of supply and the buying pressure evaporates.
Sellers seize the opportunity and drive the price all the way back down to the opening price.
At the end of the session price closes near the low of the session, suggesting there was no counterattack from the buyers.
The long wick thus formed is visible evidence of price rejection at the higher level and the buyers who entered the trend on the top are now trapped.
How to trade a Shooting star pattern?
Although a shooting star pattern can appear anywhere along a trend, a clear demonstrable uptrend must precede a valid Shooting Star pattern. A shooting star appearing in a downtrend or middle of a trend is not a valid pattern, it is just a market noise.
Furthermore, a tradable Shooting pattern is the one that appears at or near a key resistance level.
Once you have identified a tradable Shooting star pattern, your next step would be to enter the trade (sell entry).
Do not enter the trade on the shooting star candle itself. Wait for the next candle for confirmation. A confirmation candle is a bearish candle that closes below the low of Shooting star candle. Once you get a confirmation candle take a sell entry.
Place your stop-loss slightly above the high of the Shooting star candle because once the price crosses above the high of shooting star, the bearish view is over and buyers have reclaimed the control.
The target should be the next logical key support area or use ATR based trailing stop-loss to ride the move.
The chart below shows how to trade a Shooting star pattern. Observe that a shooting star pattern has formed at a resistance area with RSI divergence. Volume is also high on the Shooting star candle.
Advanced tactics (Confluence of signals) with Shooting star pattern-
Not all valid Shooting star are made equal. The probability of a successful trade increases exponentially when when there is confluence of the signals from other indicators.
Here is how to 'supercharge' your Shooting star trades.
a) Volume analysis- The volume on the shooting star day should be high. High volume indicates the smart money is dumping their huge positions to book profit. A shooting star with low volume are often just lack of interest, not a reversal.
b) RSI Divergence- If there is a bearish RSI divergence when the shooting star appears, the chances of a reversal increases. A bearish divergence suggests that the momentum behind the up move is weakening and reversal might be on the cards.
c) Liquidity grab- Probability of a reversal post shooting star increases when the candle performs liquidity sweep. A liquidity sweep occurs when the wick of the shooting star goes past a key resistance area and the reverses to close below that level.
Common mistakes to avoid while trading Shooting star pattern-
Even the experienced traders can make mistakes, so it is necessary to avoid some common mistakes while trading with Shooting star candlestick pattern.
1) Shorting the first candle- In a strong trend, you might see many shooting stars in a row before market actually reverses. Dont try to catch the exact top. Take a trade only when the next candle confirms the bearish momentum.
2) Ignoring the wick length- If the upper wick is barely longer than the body, it is not a valid shooting star pattern. It's just a spinning top or a high wave candle.
Similarly, a long lower wick suggests the pattern is weak, may be a trap.
3) Ignoring the context- A Shooting star pattern should form in an uptrend to be valid. If it appears in a downtrend or a sideways trend, it is invalid.
4) Confusing Gravestone Doji and Inverted Hammer candlestick as Shooting star pattern is another mistake that some beginners can make. A gravestone doji has no actual body. Ideally a gravestone doji's open,low and closing prices are same. While an Inverted Hammer candlestick is a bullish pattern that occurs at the end of a downtrend.
The image below shows the difference among these three candlesticks.
The Bottom line-
A Shooting star pattern is a single candle, bearish reversal pattern. This candle has a small body, a long upper wick and small lower wick and appears in an uptrend and near a resistance area.
It suggests a shift from bullish sentiment to a bearish sentiment.
A Shooting star must be traded after the next candle confirms the bearish momentum.
The trend context and confluence of signals from other indicators must be taken into account to augment the chances of a successful trade.
Post a Comment