Shooting Star Candlestick Pattern
A Shooting Star candlestick pattern is a very strong bearish reversal candlestick pattern. A Shooting Star candlestick pattern is a special type of Evening Star candlestick pattern, therefore they have a lot of similarities. The Shooting Star candlestick pattern has a few special requirements though.
A Shooting Star candlestick pattern, since it develops at the tops of uptrends, looks like a star blazing across the horizon. The long upper shadow is the tail of star dust.
Trading starts and the bullish investors appear to be in control as the share price rises, something it has done for a while now as the stock has been in an identifiable uptrend. Because of the bullish exuberance, there may even be a gap-up at the opening of the trading period. Things are looking good.
But then at some point during the trading period, the bullish investors lose control of the share price and bearish investors are able to suppress the share price all the way back down towards the opening price. This sort of trading activity causes a long upper shadow to develop. It also causes a small real body to develop. But the long, upper shadow is the most noticeable feature of this candlestick pattern.
When the next trading period opens, bullish investors are reluctant at first due to the significant selling pressure they just witnessed. This gives bearish investors their opportunity to continue the selling pressure that started during the previous trading period. When the bullish investors fail to regain control of this trading session, it confirms the Shooting Star candlestick pattern’s sell signal for those that have long positions. It also confirms a sell signal for those that want to sell the stock short.
Requirements
Listed below are the detailed requirements for a Shooting Star candlestick pattern. These requirements apply to both Shooting Star candlestick patterns and Gravestone Doji candlestick patterns. Gravestone Doji candlestick patterns are a special type of Shooting Star candlestick pattern.
- The real bodies of Shooting Star candlestick patterns can be either green or red colored, but the real body must be very diminutive in nature
- Gravestone Doji candlestick patterns are an exception, they should have almost no real body as the opening and closing prices should be nearly identical
- Gravestone Doji candlestick patterns are an exception, they should have almost no real body as the opening and closing prices should be nearly identical
- Both Shooting Star candlestick patterns and Gravestone Doji candlestick patterns have long upper shadows and do not have lower shadows
- Shooting Star candlestick patterns and Gravestone Doji candlestick patterns must develop at the top of established uptrends, the longer the uptrends preceding the Shooting Star, the better the chances are for a major trend reversal
Shooting Star and the Gravestone Doji candlestick patterns are some of the easiest Doji candlestick patterns to identify.
Characteristics & Observations
Listed below are some of the other characteristics for Shooting Star candlesticks as well as some of my personal observations.[s2If !current_user_can(access_s2member_level1)]…..
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- Shooting Star candlesticks that gap away from the previous candlestick’s real body will provide stiffer resistance for a candlestick pattern that is already extremely bearish
- If the Shooting Star candlestick pattern gaps above the previous candlestick’s upper shadow, there chances that a major trend reversal just took place just increased significantly
- If the Shooting Star candlestick pattern gaps above the previous candlestick’s upper shadow, there chances that a major trend reversal just took place just increased significantly
- Most Shooting Star candlesticks develop on extremely heavy selling volume as the bulls try to fight, unsuccessfully, to push share prices back higher as the bears start their initial, heavy-selling attack at the top of a long, protracted uptrend
- This outcome tends to happen when a stocks “valuation” becomes too high and cannot be supported by the current earnings and earnings growth rates
- This outcome tends to happen when a stocks “valuation” becomes too high and cannot be supported by the current earnings and earnings growth rates
- Shooting Star candlestick patterns are sell signals as these almost always signify major, bearish trend reversals when accompanied with higher than normal trading volume
Resistance Area
For a Shooting Star candlestick pattern, the very top of its upper shadow is the resistance area.
As with any type of resistance area, whether it’s from a trendline, a moving average line or a candlestick pattern, a resistance area is negated when a stock or index’s share price closes above the resistance area.
In order to negate the resistance area of a Shooting Star candlestick pattern, a subsequent candlestick needs to close above the top of its upper shadow. Breaking through the resistance area from a Shooting Star candlestick pattern will typically require extremely heavy buying volume. Shooting Star candlesticks create extremely stiff resistance areas.
Because of the extremely stiff overhead resistance associated with Shooting Star candlestick patterns, it usually takes multiple attempts to break through and close above resistance areas.
It is always best to scale-out of shares near the resistance area until the resistance area is negated. This trading strategy usually provides at least 2-3 opportunities to sell near the resistance area and repurchase shares lower.
Bullish Counter-Part
The bullish counter-part to the Shooting Star candlestick pattern is the Inverted Hammer candlestick pattern.
The main difference between a Shooting Star candlestick is the Inverted Hammer candlestick is where they develop in a trend. Shooting Star candlestick patterns develop at the top of uptrends while Inverted Hammer candlestick patterns develop at the bottom of downtrends.
Both are considered strong reversal signals and have a high probability of creating a trend change for the price. A lot of times, these patterns are involved in major trend changes.
Trading Strategies
I will review 2 different trading strategies for this bearish reversal candlestick pattern. The first strategy will review scaling-out of a position that you hold when the candlestick pattern develops. The second and more aggressive strategy will involve entering into a short sale position based on further anticipated declines in the share price.
Always be sure to step back and analyze the “trend of one larger degree“. This can help you determine if the pullback is going to be shorter-term in nature or if it is the start of something extremely more bearish in nature.
If You Are Currently Long the Stock
You may have noticed other sell signals flashing before the development of the Shooting Star candlestick pattern. Maybe it was a bearish reversal signal during intra-day trading that you noticed which caused you to scale-out of some shares. If so, congratulations!
However, if you are still holding all your shares, begin a scale-out process. Use the very first re-test of the resistance area as an opportunity to make a scale-out sale. If the re-test of the resistance area fails, as it usually does on the first re-test, another scale-out sale could be made. That would leave you with about 1/3 of your holdings left.
I usually prefer to use a 3 step scale-out process. With Shooting Star candlestick patterns, you can be more aggressive and use a 2 step scale-out process. Especially when the candlestick pattern develops on volume that is significantly above average. Downtrends that follow most Shooting Star candlestick patterns tend to be relentlessly bearish and last a lot longer than most investors anticipate.
One thing to keep in mind is the scale of the chart where you see the Shooting Star candlestick develop. Is it on a daily chart? Is it a monthly chart? The scale of the chart will then help to determine the speed in which your selling actions need to take place.
For example, if you notice a Shooting Star candlestick pattern develop on a monthly candlestick chart, you may have 1-3 weeks to execute the scale-out process and try to maximize profits. But be quick because a larger drop is coming. When a Shooting Star candlestick pattern develops on a daily candlestick chart, you may between 1-3 days to execute the scale-out process.
It is very important to keep everything in perspective based the scale of the chart you are analyzing. Also use other technical analysis methods for confirmation rather than relying on the candlestick pattern by itself. These other method can help to provide additional areas that can be used as scale-out areas once the downtrend is confirmed.
If You Are Looking to Short the Stock
Normally I recommend waiting for for the re-test before entering into a short position. That is not the case with a Shooting Star candlestick pattern that develops on climax volume. This powerful bearish reversal candlestick pattern is one of the few candlestick patterns I would feel more comfortable taking a short position on, especially when it develops on climax volume.
If all the above requirements are met for a Shooting Star candlestick, initiate the short sale process on the start of the candlestick after the Shooting Star candlestick. Wait for a drift upwards in price and then make the first portion of your short sale. Make the next 1/3 short sale position after a re-test and failure of the resistance area.
To help your short sale chances for success, ensure the selling volume and selling momentum are both increasing. A MACD Histogram is a great tool to use when monitoring buying and selling momentum. Make sure there is an increase in the selling momentum after the development of the Shooting Star candlestick pattern. Any slow down in selling momentum is an early indicator to start analyzing the charts and thinking about locking in short sale profits. This is simply done by purchasing shares to cover the shares sold short.
Since prices tend to move down quicker than they move up, short selling can be a very profitable trading strategy. However, it does carry the additional risk of “unlimited losses” when compared to going long on a stock. You need to know when to lock in losses in order to be a successful short seller. If you have a hard time selling anything for a loss, don’t use short-selling as a strategy. If you are not quick to pull the trigger on a loss, that loss can start leading to exponentially larger losses.
In order to minimize risk on a short position, only enter into a short sale trade after capitulating buying volume takes place. Look for a Climax Top volume spike. A capitulating volume spike helps to confirm the bearishness of an Shooting Star candlestick pattern.
Stop-Loss on Short Sale
To try and further minimize risk, a stop-loss order should be used on all short trading strategies. For a Shooting Star candlestick pattern, place the stop-loss order in 1 of 2 places:
- at the resistance area from the Shooting Star candlestick pattern as described above
- place a tighter stop-loss order at the bottom of the real body of a Shooting Star candlestick pattern
Look for the selling volume to continue in the next candlestick after the development of a Shooting Star candlestick pattern. Confirm the increased selling volume with an increase in selling momentum. Monitor the selling momentum using a MACD Histogram chart tool.
Real Chart Examples
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