The emergence of a bearish candlestick the following day affirms that momentum had changed from bullish to bearish on bears overpowering the bulls. Additionally, there are some characteristics of a shooting star formation that, if they occur, make the signal of a possible market reversal to the downside stronger. A price close that is below the opening price, indicating that price moved net to the downside for the time frame covered by the candlestick, makes for a stronger shooting star pattern.
All information on The Forex Geek website is for educational purposes only and is not intended to provide financial advice. Any statements about profits or income, expressed or implied, do not represent a guarantee. Your actual trading may result in losses as no trading system is guaranteed. You accept full responsibilities for your actions, shooting star forex pattern trades, profit or loss, and agree to hold The Forex Geek and any authorized distributors of this information harmless in any and all ways. A trader could simply enter on the open of the next candle or, if the trader was more conservative and wanted to capture a better risk-to-reward ratio, trade the retest of the wick (black dashed line).
The high of the long shadow acts as a resistance level, above which bulls struggle to push prices higher as bears enter the market. Consequently, prices start to edge lower as bears appear to be winning the battle. At the end of the session, the price retreats from the highs of the session and closes near the opening price. The Shooting Star pattern is considered a bearish candlestick pattern as it occurs at the top of an uptrend and is typically followed by the price retreating lower. Traders will often use additional technical analysis techniques such as indicators to confirm candlestick patterns, rather than relying on the patterns alone. In our proposed strategy, the volume indicator works well because it will show you whether or not sellers are indeed in control.
Some currency pairs did produce stronger reactions, particularly USDJPY and AUDJPY. As you can see, it appeared after a strong uptrend and was directly followed by a harsh downturn movement. The wick is long and to the upside, while the body is short and there is almost no wick underneath the shooting star’s body.
As with any technical indicator, each one must be examined as an individual case. The nature of the trend, the market momentum, as well as the resistance areas are all important factors that should be examined. To be classed as a shooting star it should reach or be close to a recent high in the trend that’s forming. When the same pattern forms at a trend bottom it is called an inverted hammer. Notice how the price moves higher in a nice stairstep fashion with successively higher highs and higher lows during its progression.
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This is why confirmation is needed and you have to use other momentum technical indicators. Two of the most important trend reversal indicators are the RSI and MACD indicators. So, below, we are going to show you https://g-markets.net/ how to confirm a shooting star trend reversal with these tools. The chart above clearly shows that the shooting star pattern emerges as soon as the RSI reading is above 70, asserting overbought conditions.
The stop loss placement would be just above the high of the shooting star candle itself. Since the high of the shooting star candle serves as a potential level of resistance, this would serve as a logical level at which we would want to exit our trade with a small loss. In terms of its structure, the shooting star candle has a long upper shadow and a very small shooting star’s body, meaning the trading range between the opening price and the closing price is narrow. It has a very similar structure as the Gravestone Doji candlestick pattern, though the latest has no body, meaning the opening and closing price are the same. The bulls or buyers struggle to push prices higher as more bears or short sellers enter the market and place short positions.
However, there is another method to reduce the risk while entering at a bargain price. The candle next to the reversal candle may exhibit pullbacks due to market activity that includes the exit of buyers and entry to sellers. Many traders tend to wait for such pullbacks which may see prices moving as high as half the length of the reversal candle.
As such, we can confidently label this candlestick as a shooting star pattern. In the illustration above you can see what the shooting star candlestick appears like. You will also generally want to determine a profit target based on your trading strategy, chosen risk-reward ratio and how you view the market’s potential for movement. It also might make sense to use trailing stops to help you lock in and protect profits gained as the market moves in your favor.
In the world of Forex trading, this pattern holds great power, providing traders with valuable insights into market sentiment and potential future movements. After this sluggish price action higher, we can clearly see that a shooting formation prints on the price chart. Notice that it meets all of the criteria for correctly labeling it as a shooting star formation. Secondly, the upper wick is very prominent, and the open and close are both at the lower end of the range. It is important to differentiate between the bearish shooting star pattern and the bullish inverted hammer pattern.
This article explores the captivating intricacies of the shooting star pattern and equips traders with effective strategies to leverage its potential. From identifying key characteristics to implementing robust risk management techniques, we will discuss the essentials of incorporating shooting star patterns into your trading arsenal. A Shooting Star pattern forms when the open, high, and close prices are almost the same, but the low price is significantly lower. This pattern typically occurs at the top of an uptrend and is seen as a bearish signal.