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Traders have many different tools at their disposal for analyzing charts, from indicators to formations. One of them is the so-called Shooting Star Formation or a candlestick pattern. But what is it, how can it be interpreted and, most importantly, how is it traded? To answer these and other questions in this article, we have studied the topic carefully.
What is Shooting Star?
It is considered a reversal formation, which usually occurs at the end of an uptrend and occurs when the opening price, price low and closing price are approximately at the same level.
The shape of the chart pattern, which incidentally consists of a single candle or candlesticks, also follows from this. It has a long upper shadow, which is usually two to three times longer than the body itself. The lower shadow is also either very short or absent at all.
ST is the bearish counterpart of the bull hammer. To be called a shooting star, the formation must have the following characteristics:
– An uptrend must prevail, which means that the timeline is preceded by rising candles.
– The pattern opens with a price gap, so the opening price is higher than the closing price of the previous candle.
Occasionally it even happens that the bears reject the bulls completely and push prices even lower, so that the price closes below the opening price. In this case we might also speak of a bearish ST. While both the shooting star candlestick and the so-called bearish star occur in the context of an upward movement and are therefore bearish, the bearish star is the stronger formation.
Intelligent traders do not open a position immediately upon the occurrence of the pattern, but rather wait for a confirmation on the chart before entering the trade.
How is it interpreted?
First, let’s take a closer look at how the pattern itself is formed. The opening price of the “Shooting Star” candle is higher than the closing price of the previous candle. Subsequently, the price rises sharply during the selected period, for example, during one day. This rise can be recognized by the long upper shadow.
However, the price does not stay at the same level, but bounces off resistance and then falls sharply again. The reason for this is the bears pushing the price down. Accordingly, the bears have rejected the uptrend and the price also closes near the opening price again.
Many traders view the candlestick formation as a sign of an impending downtrend. This pattern is interpreted as a sign of a weakening uptrend.
How to use in trading?
A chart pattern should always be considered in the context of previous price movement. However, traders are always advised to reduce or completely sell their long positions when a ST pattern appears. Aggressive traders usually act immediately. However, traders should first wait for confirmation of the trading signal before pointlessly opening or closing positions. While some wait for a simple confirmation in the form of the next candle, other traders rely on additional tools and indicators.