Shooting Star Candlestick Trading Tutorial and Example
Candlestick Trading Tutorials:
The shooting star candlestick pattern occurs frequently on the price charts, and it is closely tracked by the technical analysis-following market participants for possible price reversals. It is formed on the uptrend, that is - when the price has been moving upwards. Its shape represents a case of shooting star (a falling star) - as if a star has been falling from the sky towards the earth and leaving a trail of light behind it. The small-size body of the candle (which is formed by open and close prices) constitutes the star, and the long-sized upper wick of the candle represents the trail of light left behind by the falling star - hence the name. On the price charts, a shooting star appears as a single-line pattern - that is, it is made of only one candle which may be red or green - the color of the candle does not matter. The size of the star (that is- the body of the candle) should be relatively small. When formed on an uptrend, it indicates a possibility of price reversal - that is, the prices may decline after the shooting star pattern is formed on an upward price movement. Most of the active traders often wait for the next confirmation candle to form before taking a position on a shooting-star-based candlestick pattern. When formed on a uptrend, the confirmation candle should be red in color representing the price reversal to the downward direction. This article explains the details of how the shooting star candlestick is formed, what market conditions are indicated by its formation, how to trade the shooting star candlestick, and the article also covers the most recent examples of the same. To understand the working and trading of the shooting star candlestick, let's start by checking the factors needed for its formation.
Construction of the Shooting Star Candlestick
Being a single line pattern that forms frequently on price charts, novice traders often tend to enter into the trade upon spotting the shooting star getting formed on the price charts. However, a few more factors need to be kept in mind before getting into a trading position to ensure high chances of profitability. It must emerge on the price charts during the uptrend, and must have a long upper wick (shadow) which must be at least twice the size of the body. The body is constituted by the open and close prices, while the upper wick is the portion generated by the high price. The longer the size of the upper wick, the better signal it is for price reversal to downward. Ideally, the lower wick should not exist at all, or at the most have a very negligible length. As for the confirmation candle, the bigger its body the stronger the reversal signal. The confirmation candle should be red in color indicating that the price reversal is on and prices have switched to declining mode. The shooting star candle can have any size and any color. The only exception is that it should not be the Four-priced Doji Candle which has the same value for all four of its prices (open, high, low and close). The next requirement for a reliable shooting star pattern is that it should form during an ongoing uptrending price movement. Formation of a shooting star candle pattern indicates that the price reversal is possible, and the ongoing trend of the green-colored bullish candles is expected to end soon. Before entering a trade based on the emergence of the shooting star pattern, many traders may like to wait for a confirmation candle to be formed immediately after the shooting star candle. If a red-colored confirmation candle is formed, it further supports the probability about the price decline in near future and the culmination of the uptrend. Its time to go short on the stock (sell), or cut the losses if already holding a long position. This is how a typical shooting star candlestick appears:
Trading the Shooting Star Candlestick
The shooting-star patterns form very frequently on the price charts of stocks, ETFs and market indexes - so one must be cautious to spot the right set of factors before getting into a trade. Following is the background of the market conditions that results in the formation of the shooting-star candle.
During an uptrend, the bulls (buyers) are in charge and are driving the prices higher and higher which results in an uptrend being established. After few such green-colored candles, the shooting star emerges which has a small body formed of open and close prices in the lower half of the candle, and a very long upper wick with a high price value. It indicates that the price went to pretty high value, but rebounded from there to close near around the open price. Most important - the price came down which is why the body of the candle is in the lower half despite having a high price. It means that the sellers (bears) are now able to take the buyers (bulls) head-on and the market is getting into a state of indecisiveness. Since this emerges during an uptrending market, there is a strong possibility that prices may rebound to go down. The next formation of confirmation candle which should be red in color - that is, a bearish candle - will further enhance this probability, and the longer this confirmation candle the better it is for the forecast of price reversal. It will mean that sellers have gained the price control from the buyers, and there is enough supply than demand so the prices are falling. If a shooting star pattern is formed following an uptrend, and it is followed by a bearish red-colored candle, it indicates that the buyers are being outnumbered by the sellers, and the chances of price reversal looks good in the near future. If either of the shooting star and/or the confirmation candle is accompanied by a considerably huge volume, then it bumps up the chances of price reversal. The sellers have returned to the market with a high supply, they are getting stronger and are able to push the prices downards. Therefore, its time to go short - that is, sell the security, or cut the losses if holding a long position.
The shooting star candle pattern gains significance when formed during the uptrend. The formation establishes the base for a potential reversal in prices. Traders enter the trade when the shooting star is formed at the breakout of the upper Bollinger band, or at the breakout of the trend-line (like 200-day moving average), or at the breakouts of any other suitable ranges. The larger the breakout indicated by the length of the candlestick, the stronger the reversal pattern. If the shooting star is formed in the middle Bollinger band or far away from the trend-line (without breaching the trend-line), then the traders may not consider it as a strong reversal signal and they avoid the trade. When formed around the middle band or away from the breakout range, the shooting star often leads to continuation of the existing trend instead of a reversal.
Trading Scenario for Shooting Star
The following are the general considerations and scenrio for trading the shooting star candlestick.
▶ Trade Entry: Formation of the shooting star candlestick pattern during an uptrend is taken as a sign of reversal, that is - the market prices are expected to go down in the near term. So traders try to take a short sell position at or around the high price of the shooting star candle. As a few traders may like to wait for the confirmation candle to form, their sell price may be lower as the trend made the move which took the prices downwards. That's the tradeoff one needs to accept if waiting for a confirmation candle.
▶ Stop-loss Limit: The stop-loss varies from trader to trader based on their individual trade preferences, but usually while going long they set the stop-loss at 2-3 units below the low price of the shooting star baby candle. Others who enter at a higher price should adjust the stop-loss proportionatly.
▶ Profit-levels: While active trading at short intervals, traders must follow a risk-reward ratio to determine the possible profit level from their shooting star pattern trading. For instance, if the stop-loss limit is set at $10 for the trade (the maximum loss one is willing to take on a trade) and the risk-reward ratio one follows is 1/2, then one must take profits when it hits $20. If the risk-reward ratio being followed is 1/3, then one must aim for profits when the price hits a level that generated $3 for every $1 stop-loss set.
▶ Market Conditions: Along with the above mentioned shooting star formation requirement, traders should ensure that their selected price range, bands or trend-line limits are getting breached with large moves of the second bearish (and subsequent) candle. This ensures higher success rate of profitability. Although one must note that trading on technical analysis like candlestick patterns has limited success rate, so following strict stop-loss, disciplined trading and efficient capital management is advised.
Example of Shooting Star Candlestick
The following chart shows an instance of shooting star candlesticks and the uptrend that followed shortly after: As one can observe in the above chart, the shooting star candle emerged on the stock price of Tesla Motors Inc. (TSLA) around the date of 12-Sep-2019. The candle has a considerably long upper wick, reversed the ongoing uptrend that preceded the first green candle, and led to a downward move indicated by the long red arrow. Additionally, there was a range breakout with large value which added to the possibility of the price reversal. Traders usually set their profit targets and stop-loss levels based on the risk-reward ratio of their choice as mentioned in the previous section.
Latest Shooting Star Formations
FKnol.com has a dedicated section on candlesticks where the list of stocks, ETFs and indexes forming shooting star candles is updated on a daily basis. At present, the following are three examples - one each from stocks, ETFs and indexes - which have formed the shooting-stars as of the mentioned date (in reverse chronological order): 1) On Tuesday, Jul 20, 2021, the stock price of Healthcare sector based United Health Group Inc. (UNH) formed the following Shooting Star Candlestick pattern:
...and there's more. FKnol.com everyday checks the stock price and candlestick formation across hundreds of stocks, ETFs and indexes to look for shooting star formations. Please see the full list of recent shooting star formations for: ▶ Full list of recent Shooting Star Stocks ▶ Full list of recent Shooting Star ETFs ▶ Full list of recent Shooting Star Indexes
The Bottom Line
Trading candlesticks like the shooting star needs strict discipline and emotion-free trading. Candlestick trading is a part of technical analysis and success rate may vary depending upon the type of stock selected and the overall market conditions. Use of proper stop-loss, profit level and capital management is advised.
Candlestick Trading Tutorials:
One can also explore the similar candlestick formations on various dates using the below screener: