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The shooting star candlestick pattern is a bearish reversal pattern that appears during an uptrend.
The key characteristics of the shooting star candle are:
1.Small real body (the difference between the open and close) at the lower end of the daily range.
2.Long upper wick (shadow) that is at least 2-3 times the size of the real body.
3.Little or no lower wick (shadow).
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The shooting star pattern suggests the following:
•The market opened and moved higher during the day, but then sellers took over and pushed the price back down, leaving a long upper wick.
•The small real body at the lower end of the range indicates the bulls were unable to hold onto the gains.
•This price action suggests the bullish momentum is starting to wane and a potential reversal may be imminent.
When a shooting star candle appears after an uptrend, it signals that the buying pressure is diminishing and the sellers are starting to gain control. Traders often use this pattern as a signal to enter short positions, expecting the uptrend to reverse and head lower. The long upper wick demonstrates the market’s rejection of higher prices.
The shooting star is considered a more reliable reversal signal when it appears after a significant uptrend, rather than just a minor pullback within a larger bull market. Traders should also confirm the reversal with additional bearish technical indicators or price action.
Psychology of the Shooting Star Candlestick Pattern
The Euphoric Moment and Reversal
One of the reasons the shooting star candlestick pattern is considered a reliable reversal signal is the unique psychology behind its formation:
1.Bullish Euphoria: As the stock price shoots higher, buyers are enjoying their gains and feeling a sense of euphoria. This euphoric sentiment often marks a climactic top in the uptrend.
2.Short Selling Pressure: At this point, short-sellers begin to identify the exhaustion of the bullish momentum and start to sell the stock aggressively. This influx of sell orders puts significant pressure on the price.
3.Panic Selling: Seeing the sudden price reversal, the late-arriving long buyers also start to panic and sell out of their positions. This panic long liquidation, combined with the short-selling pressure, leads to the sharp reversal and the formation of the shooting star candle.
The Importance of Preceding Bullish Candles
The shooting star pattern is considered even more reliable when it forms after a series of three or more consecutive bullish candles. This creates an exponential buildup of bullish pressure on the chart, leading to an even more pronounced exhaustion signal when the shooting star emerges.
The long upper wick of the shooting star in these cases suggests that the price is about to reverse with greater strength, as the market sentiment shifts from euphoric bullishness to bearish pessimism.
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Trading the Shooting Star Candlestick
Trade Entry
Confirm an active bullish trend
Identify a candle with a small body and a large upper wick
Wait for a bearish candle to break the low of the shooting star’s body
Ensure elevated trading volume, indicating heavy selling pressure.
Stop Loss
Place the stop loss order above the upper wick of the shooting star candle to protect against false signals.
Taking Profits
Set the price target to be equal to the size of the shooting star candle pattern.
Alternatively, aim for a price move of three times the length of the shooting star, including the wick.
By understanding the psychology behind the shooting star pattern and following a disciplined trading approach, traders can potentially capitalize on the reversal of a bullish trend.
Shooting Star vs Inverted Hammer Candlestick Patterns
| Characteristic | Shooting Star | Inverted Hammer |
|---|---|---|
| Market Trend | Appears at the end of an uptrend | Appears at the end of a downtrend |
| Body Size | Small, at the lower end of the daily range | Small, at the lower end of the daily range |
| Upper Wick | Long, at least 2-3 times the size of the body | Long, at least 2-3 times the size of the body |
| Lower Wick | Little or no lower wick | Prominent lower wick |
| Bullish/Bearish Signal | Bearish reversal signal | Bullish reversal signal |
| Meaning | Indicates the bulls are losing control and the bears are taking over | Indicates the bears are losing control and the bulls are taking over |
| Confirmation | Requires a bearish follow-through candle | Requires a bullish follow-through candle |
| Reliability | One of the most reliable reversal patterns | Less reliable than the Shooting Star |
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