Shooting Star candle is one of the most widely used single candles chart setups to determine a bearish reversal. In case if an uptrend is followed by a candlestick chart with a long upper shadow and small body with a close rate near the open, the technical analysis points to a possible change in the market sentiment. In simple words, the price action points to a substantial growth of an asset price at the beginning of the period and a sharp reversal after achieving a strong resistance level. Although the body of the Shooting Start is still green in accordance with the previous uptrend, the bearish reversal is likely amid a consistent level of offers at the top of the market.
What is Shooting star candlestick?
During a long-term uptrend, Forex traders always try to determine a possible top of the market, which would suggest an end of the recent bullish action and signal a deep bearish retracement if not a reversal. That level is often used to take profits from previous long positions, as well as open new shorts. A trading approach aimed to find reversal points is called against-the-trend strategy. The Shooting star candlestick allows traders to identify possible reversals in the price action.
What does Shooting star candle mean?
The upper shadow of the Shooting Star has to be at least twice as big as the body of the candlestick. The less the body is, the more significant the resistance level becomes. Thus, the likelihood of the bearish reversal is getting higher. At the same time, the lower shadow of the same candlestick chart has to be very small or absent.
The screenshot below shows how the Shooting Star Candle looks like:
What does the Shooting Star Candlestick Show?
The Shooting Star Candlestick chart usually points to a strong resistance level where a large volume of postponed sell-orders is placed. In most cases, it signals at least a short-term reversal, however, exceptions are still possible. For instance, if the bulls were able to absorb the flow of sell-orders and regain the momentum, then the bullish continuation would lift rates further north and the uptrend will be continued. This is why it is always important to consider the pattern with a wider angle of view, taking into account the context which follows the Star strategy. Traders should assess the trends momentum before the candlestick and monitor the price action after it. If the following candle is bearish and it confirms the reversal, then it would be reasonable to open counter-trend short positions. Otherwise, the signal might be false and additional technical tools are needed to determine further trend’s direction.
Inverted Hammer vs Shooting Star
Both candlesticks look exactly the same, but the difference is when they appear. In contrast to Shooting Star Candles, the Inverted Hammer is coming after the downtrend, pointing to a bullish reversal or correction. Therefore, it’s always important to watch how Japanese Candlesticks Interact with each other and in what sequence do they appear.
How to choosing the best time frames
Since the Shooting Star candles approach is based on a possible reversal of the recent uptrend, the best performance is noticed when analysing the markets on long-term timeframes such as weekly and daily charts. Intraday short-term reversals are also possible after Candlestick Shooting Star appeared, however, the depth of the against-the-trend action might be limited due to frequent price fluctuations on hourly timeframes. Thus, trading with the intraday timing suggests much tighter stop-loss orders and lower targets compared to the swing trading strategy based on the daily chart.
How to use Shooting Star Candles?
One of the best applications to trade with Shooting Stars is described below:
- After a sustainable uptrend, a Shooting Star Candle was formed;
- If the following candlestick is bearish, open a short position;
- Set the stop-loss order 5-10 pips above the highest rate of the previous candlestick (red);
- Take-profit orders depend on the asset’s volatility and can be set in the range of 30-100 pips.
Shooting Star candle in combination with Technical Indicators
Since the Shooting Star strategy is a preliminary signal pointing to a likelihood of a bearish reversal, an additional confirmation from other technical indicators is required. The counter-trend approach suggests using oscillators and envelope indicators which might show a reversal signal. For example, if the Shooting Star’s close rate is below the upper line of the Bollinger Bands indicator, while the shadow crossed the resistance level, it’s worth considering short positions as the bullish breakout did not happen. At the same time, if the Relative Strength Index has a bearish divergence, the sell-signal might become more powerful. Another example of using oscillators happens when Stochastic RSI or Williams %R cross the oversold threshold from above. Forex traders should remember, that the Shooting Star Candle could just point to a strong resistance level, but not necessarily a reversal, which has to be confirmed by different combinations of technical indicators in order to improve the efficiency of the trading system.
Profitable Trades with Shooting Star Candles
Here are several examples of profitable entries using the trading system based on Shooting Star Candlesticks.
Shorting EUR/GBP after the confirmed the bearish reversal:
The four-hourly chart has an obvious uptrend of EUR/GBP started on August 2, 2019, after the pair had found a local bottom. At some point, the bullish momentum was exhausted as the bears had an aggressive defence above 0.9000 resistance. The upper shadow of the highlighted candle is much larger than its body, thus the Shooting Star appeared. The next candle was bearish, which confirmed the short entry, while the stop-loss order was set at the highest levels of the previous red candlestick. Profits were taken manually after EUR/GBP went 50 pips in the right direction.
Selling EUR/CHF after Shooting Star appeared on the top of the Bollinger Band with the confirmation from Stochastic RSI:
EUR/CHF was in an uptrend on the 4-hourly chart below. The Shooting Star candle signalled a strong resistance level and closed below the upper line of 55-bars Bollinger Bands. The confirmation came in when Stochastic RSI oscillator went off the overbought zone, while its lines crossed each other. Profits were taken when the oscillator had an opposite signal.
If you like Shooting Star strategy, you might also be interested in this Forex scalping strategy
Advantages and Disadvantages of Strategy
- Easy-to-understand visual trading signal;
- The candle points to a strong resistance level of the recent uptrend;
- If the following candlestick pattern confirmed the retracement, against-the-trend short positions have a high percentage of profitability.
- False signals are possible;
- A confirmation is required from the following candlestick or additional technical indicators, which reduces potential profit.
The Shooting Star candlestick is one of the multiple examples of efficient application of Japanese Patterns. The appearance of the formation points to a strong resistance level and a possible reversal. However, the efficiency of the system depends on several factors such as the context and the previous price action as the reversal comes after a sustainable uptrend only. At the same time, additional confirmations are required as the single-candle pattern might have false signals. Traders should double-check the market’s sentiment either with the following candlestick or additional technical indicators, the signals of which have to coincide with the change of the uptrend. Since the strategy is based on against-the-trend approach, traders should control stop-loss orders and take profits in time.