What is a shooting star candlestick and how do you trade it?
Candlesticks provide plenty of insight into how market prices might behave. These patterns could signal entry and exit points for your trade. Discover one of the most significant candlesticks in trading – the shooting star.
What is a shooting star candlestick pattern?
A shooting star candlestick pattern is a chart formation that occurs when an asset’s market price is pushed up quite significantly, but then rejected and closed near the open price. This creates a long upper wick, a small lower wick and a small body.
The upper wick must take up at least half of the length of the candlestick for it to be considered a shooting star. And, it must appear at the top of an uptrend. As a result, the shooting star candlestick pattern is often thought to be a possible signal of bearish reversal. This means an uptrend might not continue (prices may fall).
Traders should be careful not to confuse the shooting star pattern with the inverted hammer candlestick – as both have a longer upper wick and small body. However, the inverted hammer signals bullish as opposed to bearish reversal, and it is often observed at the bottom of a downtrend.
Shooting star pattern example
Let’s say you’re following the Barclays share price, which opens the trading day at $339.60. The share price starts going down, reaching $334.30, but then some good news within the company causes the share price to rise rapidly, reaching a high of $379.60. Finally, it closes at $342.30. These movements create a shooting star candlestick, as pictured below.
Benefits of the shooting star pattern in technical analysis
One of the main benefits of the shooting star pattern in technical analysis is that it is a simple formation to identify. Further, it is reasonably reliable in identifying a bearish reversal – especially if it appears near a resistance level.
Keep in mind that the shooting star candlestick should never be viewed in isolation. Before acting on the formation, confirm the signal using technical indicators. For example, if you think that a shooting star at the top of an uptrend means possible reversal, you can test the bearish bias using Fibonacci retracement. This indicator can pinpoint the degree to which a market will move against its current trend.
How to trade when you see the shooting star pattern
There are a few steps you should follow if you want to trade when you see the shooting star pattern. Remember that the shooting star could indicate negative reversal – in other words, market prices could go down. If you want to take advantage of falling prices, you can do so via derivatives such as CFDs.
Follow these steps to go short when you see the shooting star candlestick:
- Open an IG trading account or log in to your existing account
- Look for the asset you want to trade in the search bar
- Enter your position size
- Select ‘sell’ in the deal ticket and confirm the trade
Shooting star candlestick pattern summed up
A shooting star candlestick pattern occurs when an asset’s market price is pushed up quite significantly, but then rejected and closed near the open price. It could be a possible signal of bearish reversal, meaning an uptrend might not continue.
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