Shooting Star Candlestick Pattern Trading Guide

What As A Shooting Star Candlestick Pattern?

The shooting star candlestick is a bearish reversal one candle pattern that is relevant during an up direction in price.

You can find this pattern on every time frame (easier to see on a candlestick chart and not a bar chart) and the features are the opposite of the hammer candlestick:

• A long upper wick that makes up the over 2/3 of the total height
• The price closes in the bottom 1/3 of the candlestick – small body
• There can be a small or no lower shadow

The shooting star candlestick means that sellers have been able to push the price down from the highs and hold the lows at the close.  This is a bearish event in the market.

What Does A Shooting Star Candlestick Mean?

This pattern highlights a market that during the period represented by the candlestick, buyers were strong enough to push price higher.

Sometime during the time period represented, selling pressure was strong enough to overwhelm the buyers and drive prices lower.

Sellers were able to hold prices near the lows and while the price may close lower than the open, the price can close higher than the open.

Imagine the price is in an uptrend and you see the appearance of the shooting star.  On a lower time frame, you are seeing a complete down-trending price structure of lower highs and lows.

In your current time frame, you are seeing sellers take out the buyers and the potential of a change of trend or in the short term, direction.

Traders will often place a sell stop order just below the lows of the shooting star candlestick to enter a short trade.

The long upper wick can be hard on the psychology of traders that are long.

1. Buyers are enjoying the profits they gained during the uptrend
2. The long upper shadow shows a flurry of selling activity stepping into the market
3. Closing on the lows incites fear in those holding long positions
4. With those with a bearish view on the market and buyers selling to exit, we can see a sharp drop in price

The key is that we need to see a market that is in an obvious mature uptrend.

How To Trade The Shooting Star Pattern

Considering that this pattern is bearish, we are looking to short when it appears.

But we don’t want to short every time it appears on the chart.  These candlesticks can show up in random locations on the chart.

The price was in an uptrend and we had a break of a trend line which indicates the uptrend is still intact.  If you would have shorted with the appearance of a reversal candlestick, you’d have a losing trade.

Here is the thing…..

The shooting star candlestick is a bearish reversal candlestick just like any other.

Take a look at these reversal candlesticks:

All we are seeing is an indication of who is in control of the market at that point that shows a potential price reversal.

You can see strong momentum down with the Marubozu, lack of further upside with the Descending Hawk, and a wipeout of buyers with the 3 outside down pattern.

You can use the same trading strategy to trade any reversal candlesticks, including the Shooting Star candle.

Trading Strategy For Reversal Candlesticks

This strategy is pure technical analysis based:

1. Look for a trending market.  You can use a trading indicator like the 50 period moving average or use higher highs and lows to show an uptrend.
2. Price enters an area where you may expect a reaction
3. Look for a reversal candlestick such as the Shooting Star

This example takes into account a breakout plus the ending of an A-B=C-D price move.

1. Price is trending upwards as noted by higher highs and lows

2. Price breaks out of a prior resistance area with momentum

3. We see the Shooting Star candle appear after a strong momentum breakout.  We are also at the “D” of A-B=C-D price move

4. Traders that were long into the breakout and those that went long at the breakout, see sellers step in.

5. Price collapses with an eventual 14% drop in price

How To Improve The Strategy

While traders will talk about support and resistance levels, the key is knowing if the levels you choose have any meaning. Sticking to obvious turning points you can see on the chart is the best bet when looking for levels.

When trading a reversal, we want to have a reason to think of a reversal.

Does that make sense?

Think of strong momentum to the upside in price.  Traders are feeling good as they see a strong price movement carry their trade to profits.

A slight pullback is normal and the longs sit through the slow drift.

When price drives back up and they see the Shooting Star pattern, what are they thinking?

Looking at this, what would you be thinking as someone holding longs?

I personally use this candlestick as part of my failure test strategy.

Incorporating a momentum measure either by viewing candlesticks or a trading indicator such as the RSI can add another level to the probability of trading reversals.

Setting Your Stop Loss

Traders can use the price pattern itself by setting their stop loss above the turning point.

Using the ATR as your stop-loss is also viable.  Traders will have to decide if the break of the pivot high will be enough for them to believe the setup failed.

While the ATR can give you some wiggle room and takes into account market volatility, a trader has to know what their psychological limits are when the price goes against them.

Wrapping Up

• Shooting Star is a single candlestick reversal price pattern
• Look for this candle to form in an uptrend to signal a possible change in market direction
• The structure of the candle makes it easy to spot – long wick, small real body
• Only consider reversal candlesticks at points on the chart where a reaction is expected
• Using momentum as a prerequisite in the up move can often lead to explosive down moves
• Stop-loss can be set at ATR levels or just above the high of the candle
• Consider trailing stops as you may have caught the beginning of a bear trend

Have you ever traded reversal candlesticks before?

Please let me know in the comments and if this article answered your questions.