A shooting star pattern is a bearish candlestick pattern that signifies a potential price top and reversal. It occurs after an uptrend and indicates that the bulls may be losing control, and a bearish trend may be on the horizon.
How is a Shooting Star identified? #
A shooting star pattern has the following characteristics:
- Preceding Uptrend: The pattern typically occurs after an uptrend or at least a significant rise in price.
- Small Real Body: The real body of the candle (the difference between the open and close price) is small and located at the lower end of the trading range. The color of the body is not important, but a red (or black) body has more bearish implications.
- Long Upper Shadow: The upper shadow (the difference between the high and the close price) should be at least twice as long as the body. There should be little to no lower shadow (the difference between the open and the low price).
Accuracy of a Shooting Star #
The shooting star pattern is not a definitive indication of a reversal but suggests the possibility. As with any technical analysis pattern, it should be used in conjunction with other technical indicators or chart patterns to confirm its predictions. Additionally, the pattern is more reliable when it is followed by a gap down or a large bearish candle. A confirmation of the trend reversal on the next trading day increases the accuracy of this pattern.
More Information about Shooting Star Chart Patterns #
The name “shooting star” comes from the visual analogy to a shooting star in the sky. The candlestick pattern’s upper shadow resembles a shooting star’s trail.
A shooting star pattern can be used to set a sell order. Traders often set a sell order below the low of the shooting star’s real body, as this confirms a trend reversal.
It’s worth noting that just like any other trading strategy, the shooting star pattern isn’t foolproof. It can give false signals; sometimes, a trend may not reverse even after a shooting star appears. Risk management and setting stop-loss levels can help manage potential losses when the signal is false.