The shooting star
The shooting star is the final single candlestick pattern we will cover before advancing to multiple patterns. It is a highly effective price action, so it is often used in trading.
The shooting star has the same appearance as an inverted paper umbrella.
A shooting star differs from a paper umbrella in that it has no lengthy lower shadow, instead having an upper shadow which is at least twice this size.
The body colour is not essential, but the pattern does appear more reliable if red.
The longer the upper wick, the more bearish. Both patterns include a small real body as part of their definition; however, sometimes a tiny lower shadow is accepted. The shooting star suggests the prior trend must have been bullish.
Here are the thought process behind the shooting star:
– The stock is showing an upward trend, indicating that the bulls are firmly in charge. This usually leads to higher highs and even greater lows for the stock or market.
– On the day the shooting star pattern appears, the market trades higher, as anticipated, and creates a new all-time high.
– At the highest point of the day, selling pressure is visible as the stock price declines to close near its lowest point, creating what’s known as a shooting star.
– The signs suggest that bears have entered, as they have been able to bring prices down and create a long upper shadow.
– It is expected that the bears will continue to put pressure on the market over the coming trading sessions, providing potential shorting opportunities for traders.
Examine the chart where an impactful shooting star can be seen marking the top of an uptrend.
As already established, it’s best to let the trade run its course until either the stop loss or target is hit. Other than potentially trailing your stop loss, there’s no need to interfere with the trade. We’ll go over trailing stop losses in due time.
This chart suggests that both the risk-taker and risk-averse would have profited greatly from a trade based on a shooting star.
An example, where a shooting star was detected could have had both risk-averse and risk-taking traders entering the trade. Nevertheless, the stop loss was exceeded, so exiting is the desirable action here. Most of the time, when the stop-loss triggers, it is best to exit the trade.