Understanding The Shooting Star Candlestick Pattern
The Shooting Star Candlestick Pattern can identify bearish market reversals and provide traders with ideal price levels to short or exit the trade. The pattern is easily identifiable as traders can spot it with an extremely long upper wick, which also signals the market reversal point. In our article, we will learn in-depth about the Shooting Star Candlestick Pattern and how to trade it.
What is a Shooting Star Candlestick Pattern?
A Shooting Star is a candlestick pattern formed when currency pair prices open, increase immediately, and then close near the opening price, indicating a downtrend reversal. The candlestick Shooting Star is formed after three or more green (bullish) candlesticks appear simultaneously, marking higher prices of the currency pair. The green candlesticks are followed by a small-bodied red (bearish) candlestick with an extremely long upper wick and no lower wick at all, indicating that the overall rising uptrend is now going to reverse into a downtrend. The long wick also indicates a strong buying pressure during the last few days, but the price is brought near to the close price as the day ends and selling pressure increases.
Is a Shooting Star Candle bullish?
The Shooting Star Candlestick is a bearish candlestick on its own. The bullish version of the Shooting Star Pattern is called the Inverted Hammer that is formed after a currency pair’s prices stop falling, reverse and start rising instead. The Inverted Hammer Candlestick pattern is formed after a few red (bearish) candlestick patterns appear in the market. It is formed as a small-bodied green (bullish) candlestick with an extremely long upper wick and no lower wick. The long upper wick indicates a significant currency pair price top and the absence of a lower wick indicates that the currency pair prices did not fall below their opening prices. When this candlestick is followed by other green candlesticks that open at a higher price level and make higher highs in the market, the Inverted Hammer Candlestick pattern is confirmed and the market is said to be in an uptrend. This pattern signals traders to long or enter their trades in the market.
Example of the Shooting Star Pattern
Let us assume that you want to trade USD/EUR, which is currently in an uptrend, making higher highs in the market. The currency pair is trending at 2.5, with the current price top at 4. As you are monitoring the market, the currency pair makes a new price high at 5.5 right before the market closes at 4.2, higher than the previous day’s close. You decide to enter your first trade at this point and place a long order. The next day, the market opens at 4.3, which is again higher than the previous day’s close and trades between 4.3 and 4.6 the entire day, making a brand new high of 6 and no lows. You decide to exit your first order at 5.5, which was also the previous day’s high and wait until the market forms a new trend. At this point, the selling pressures on the market increase as more and more traders like you exit the trade to benefit from the price increase. The selling pressures lead to a reversal in the market, which is confirmed after another bearish or red candlestick is formed the next day. The current candlestick opens at a brand new low of 1.5, confirming the downtrend reversal. At this point, you decide to short the trade and enter the market at 1.5. Soon after, the market falls even lower, touching price points of 1, 0.75, 0.60, 0.50 and so on. This signals you to short the trade and hold them until the market rises again.
How to use the Shooting Star Candlestick
- Identify a currency pair currently in an uptrend. Determine the reversal point where the currency pair marks a new high but trades and closes near its closing price.
- Short the trade at the price the candlestick opens lower than the previous day’s close price.
- Place a stop-loss order at the latest swing high to maximise returns.
- Place your take profit orders at twice the distance of where you have placed the stop-loss order to minimise risk.
- After you enter the short position, wait for the markets to fall further and buy back more units of the currency pair at a lower price.
- Hold your position and monitor the market until you receive a confirmed signal of the market reversing in the upward direction once again.
Start trading the Shooting Star Candlestick today and short the trades
The Shooting Star Candlestick Pattern can be used to identify the ideal price levels at which you can short the currency pair and benefit even from the falling markets. Start forex trading in Australia today with Blueberry Markets to get hold of popular currency pairs, robust technical tools and a seamless trade execution system. Sign up for a live trading account or try a risk-free demo account.
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