The Shooting Star Candle in Stock Trading

Recognizing a Shooting Star Candle on a Price Chart

A shooting star candlestick is characterized by a small real body located at the lower end of the candle, with a long upper shadow and little to no lower shadow.

The length of the upper shadow in a shooting star candlestick pattern is significant. The longer the upper shadow, the stronger the indication of a potential reversal. No fixed length determines the validity of the pattern, but generally, a relatively long upper shadow compared to the real body of the candlestick is considered more reliable. Traders often look for shooting star candles with upper shadows that are at least twice the length of the real body

Its appearance resembles a star falling from the sky, hence the name "shooting star." This pattern usually occurs after an uptrend and signals a potential reversal in the market.

How to Interpret a Shooting Star Candlestick Pattern?

Interpreting a shooting star candlestick pattern involves considering the context in which it appears. The long upper shadow signifies that buyers pushed the price higher during the session, but eventually, sellers regained control, pushing the price back down.

This rejection of higher prices suggests a shift in market sentiment and a possible trend reversal.

The placement of a shooting star candlestick pattern on a price chart can provide additional insights. While the shooting star is typically considered bearish regardless of its location, its significance may vary depending on the context.

In an uptrend

If a shooting star appears after a prolonged uptrend, near a resistance level, or at a significant Fibonacci retracement level, it carries more weight as a potential reversal signal.

These factors suggest that the shooting star is occurring in a region where selling pressure may be stronger, reinforcing the likelihood of a bearish reversal.

In a sideways market

Conversely, if a shooting star occurs in isolation or within a choppy, sideways market, its significance may be diminished. In such cases, it is advisable to consider additional technical indicators or confirmatory signals to validate the potential reversal.

In a downtrend

A shooting star candlestick appearing within a downtrend can still hold significance, albeit with a slightly different interpretation.

In this context, a shooting star candlestick suggests a potential exhaustion of selling pressure and a possible reversal to an uptrend. While the initial rise could not be sustained, the opening price also remained the lowest price during the trading day.

Keep in mind that a shooting star is generally considered less reliable when it appears in a bearish trend.

Therefore, while a shooting star pattern generally holds bearish implications, its location within the broader price chart can provide valuable contextual information to traders in terms of the strength and reliability of the reversal signal.

How to Find the Shooting Star Pattern?

Finding the shooting star pattern requires careful observation of price charts. Look for candles with long upper shadows and small real bodies near the top of an uptrend.

Several technical analysis tools and platforms offer automatic identification of candlestick patterns, including the shooting star.

In the ChartMIll stock screener, the "shooting star" pattern is automatically recognized. So you can use it as a screening filter.

To do so, select the TA indicators menu on the stock screener page and open the drop-down menu under 'Candlestick'. Finally, pick the 'Bearish Shooting Star' pattern.

A Trade Example Using This Pattern

A bearish shooting star candle formed on March 6, after the price first rose for three consecutive days to the $16.5 price level.

Note that this price increase took place at a relatively low volume. Moreover, the bearish shooting star pattern formed at an earlier support level which then acted as resistance.

The following day, the price moved lower and closed the trading day at the lowest intraday price. This was the confirmation candle.

A short entry just below the bearish confirmation candle with a short stop-loss just above the shooting star candle and an initial price target around $14.5 (most recent swing low) was certainly an acceptable setup from a risk/reward standpoint.

Is the Shooting Star Candlestick reliable?

According to thepatternsite.com, the reliability of the candle itself is rather limited. Only in 57% of the cases, a decline occurred after such a candle.

Therefore it is important not only to consider the candle itself but certainly to wait for a confirmation candle.

The data also show that the pattern works best when it occurs at the end of an intermediate uptrend in a long-term downtrend. See the chart above as an example.