Shooting Star

Refers to a bearish candlestick pattern formed up of a long upper shadow, little or no lower shadow, and a small real body near the day's low.

A shooting star formation is a bearish candlestick that occurs in candlestick charting. It has a long upper shadow, little or no lower shadow, and a small real body near the day's low. 

Shooting star

It appears after an uptrend. A candlestick forms when a security opens and advances significantly but closes the day near the opening again.

The candlestick formation must appear during a price advance for a candlestick to be considered a shooting star. Also, the distance between the high of the day and the open price must be more than twice as large as its body. 

There should be a little shadow or no shadow below the real body. Therefore, it is interpreted as an impending bearish reversal to the downside.

To be precisely interpreted, the formation is considered valid only when it appears following a recognizable uptrend of some duration and at or near the highest price in the market session.

The pattern is one of many signals of potential market reversals recognized in candlestick charting. Other reversal patterns include the hanging man pattern, engulfing candles, and Doji candlestick formations.

Identifying the Pattern

Like all candlestick patterns, this pattern must be correctly identified to be helpful to traders. The key characteristics of this candlestick pattern are as follows:

Bullish and Bearish candle

  • The upper tail is also known as a "shadow," which is the line that forms above the candlestick's body and is at least two to three times longer than the candlestick's body.
  • The lower shadow or tail is the line that extends below the candlestick's body. Again, it must be either very short or non-existent; it should, at most, be not much longer than the candlestick's body.
  • The candlestick's body should be concise, indicating the opening and closing prices. In other words, the opening and closing prices should be very near each other.

Additionally, there are some characteristics of this formation that, when occurring, signal a possible bearish market reversal. 

The first trait is the closing price. A closing price below the opening price indicates that the price moved down for the time frame covered by the candlestick, making for a more robust shooting star pattern. The pattern is also considered stronger if no lower tail or shadow exists.

If the candlestick's closing price is below its opening price, and there is no lower tail extending below its body, that shows that the price closed at the lowest price traded during the candlestick.

Another strong trait of an impending bearish reversal is when the candlestick's upper shadow is much longer than the candlestick's body (three times longer, four times longer, or more). 

It indicates that though the price traded significantly higher during the time frame, the candlestick reflects. Higher prices were firmly rejected as sellers entered the market and buyers exited, driving prices sharply down to end the period and form the shooting star pattern.

The Difference Between the Shooting Star and the Inverted Hammer 

An inverted hammer has a short candle with a long upper shadow. It shows that some selling pressure followed strong buying power. Overall, it indicates more buyers than sellers because the price has closed above open. 

This is the exact opposite of a normal bullish hammer candle.

It marks a potential bearish turning point and occurs after a price advance. Conversely, an inverted hammer marks a potential bullish turning point and occurs after a price decline.

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How to Interpret

Its appearance on the technical charts signifies that a security's price has reached a high, and a reversal is around the corner. This pattern is most predictive when it forms after three or more consecutive candles rising with higher highs. 

Its occurrence is possible even during a period of overall rising prices with few bearish candles.

Following the advance, the star opens and moves higher during the session. This is an indication of buying pressure. However, as the session proceeds further, sellers step in and cause the price to fall back to its open price, erasing the gains made during the candle. 

The long upper shadow depicts the buyers who purchased during the session but are currently in a losing position as the price falls back to the candle's open level. 

Traders must know that the candle formed after the shooting star pattern confirms the candlestick pattern. Therefore, the next candlestick's high must stay below the shooting star's high and end below the pattern's close. 

The ideal formation is formed when the candle after the star gap lowers or opens near the previous close and wanes lower on heavy volumes.

A bearish day following a star appearance confirms the price reversal, indicating that the prices could continue to fall. However, even if the prices rise, the price range may act as a resistance.

Example

This is a 2-minute chart of Hewlett Packard from June 10, 2016. The image illustrates a classic shooting star trading example.

The trading analysis starts with identifying the upward trend in price.

Suddenly, a shooting star candlestick appears, marked with a green circle on the chart. In addition, we can observe a small candle body and a big upper wick, confirming the pattern.

Entry

The next candle after is bearish, confirming the pattern.

After the pattern confirmation, we sell the security by placing a stop loss order above the upper wick of the star candle to secure our short trade.

This way, we will be protected if the price creates an unexpected bullish move caused by high volatility.

Our maximum loss will equal the distance between the level we short Hewlett-Packard (HPQ) and the stop loss order level.

The first blue arrow in the image measures the size of the candlestick. According to the strategy, we should see a target equal to three times the size of the pattern.

Profits Raining

Starting from the lower candle wick, we apply the size of the pattern three times. This is how we got the big blue arrow, pointing out the minimum target of our trading strategy.

To maximize profits, we need to stay in the trade until the price action closes a candle beyond the minimum target.

The price created one correction during the bearish move on the way down. After that, the downward activity resumes, and after 18 periods, we short HPQ. The price action closes a candlestick below the minimum target of the star pattern.

Exit

The candle is relatively big and goes way beyond the minimum target-a perfect opportunity to exit.

Exit

As we can observe, the star candle pattern indicates that the trend might reverse. This creates an excellent setup to short Hewlett Packard right at the beginning of an emerging bearish trend. 

Despite the minor correction on the way down, it reaches the target of three times the size of the candlestick.

Key Takeaways
  • A shooting star is a bearish pattern that forms in candlestick trading.
  • It is used during technical analysis to predict a possible bearish reversal.
  • The pattern is interpreted as a bearish reversal signal, showing a failed attempt to drive the price higher and an intense selling action, ultimately determining the candlestick's formation.
  • It occurs after an advance and indicates the price could start falling.
  • The formation is bearish due to the price increasing significantly during the period, but the sellers took over and pushed the price back towards open.
  • Traders typically wait to notice what the candle (period) following the pattern does. If the price declines during the next period, they may sell or be short.
  • If the price rises after the formation, it may have been a false signal, or the candlestick is marking a potential resistance area around the price range of the candle.

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Researched and authored by Rohan Kumar Singh | LinkedIn

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