Most traders prefer the Japanese candlestick chart because the price bars can form identifiable shapes and patterns that have significant market implications.
These patterns, known as candlestick patterns, are one of the most reliable trading tools used by price action traders, and the shooting star candlestick pattern is one of the most widely used due to its price reversal potentials.
Technical analysts and traders use the pattern to identify or confirm a potential bearish trade setup in the market.
In fact, it is about the most widely used single candlestick patterns for determining a possible bearish reversal, which is why we are going to deeply explore the pattern in this post.
In the article, you will learn the following :
- What the shooting star candlestick pattern is
- The psychology behind it
- How to identify the pattern in other candlesticks
- The right way to use the pattern in your trading
- The common strategies you can trade with the pattern
- Mistakes to avoid when trading the pattern
What is a shooting star candlestick pattern?
Also know as the bearish pin bar, the shooting star candlestick pattern is a bearish reversal formation that consists of just one candlestick and usually forms after a price swing high.
It shows that at some point during the trading session, the price rose dramatically in line with the preceding upswing but later fell and closed near the level where it opened.
Thus, a shooting star candlestick has a long upper wick, a small real body that is positioned near the lower end, and little or no lower wick.
The long upper wick is known as the tail, while the short lower wick is called the nose. The tail is usually about twice or thrice the size of the body, which means that it makes up about 2/3rd or 3/4th of the entire range of the candlestick.
As with every candlestick, the body is the part between the opening price and the closing price, and it can have a bullish or bearish color.
It takes a bearish color (red or black) if the trading session closed below its opening price.
When the trading session closes above its opening price, the body of the shooting star pattern will have a bullish color (green, white, or any bullish color).
But whatever the color of the body, the shooting candlestick pattern has a bearish implication — even though the one with a bearish body may be considered more bearish than the one with a bullish color.
Naturally, the bearishness of the shooting star results from the long upper tail and its position in the price action.
For the pattern to be a shooting star, it has to occur at the top of an upswing, which is what differentiates it from its look-alike, the inverted hammer.
As opposed to the shooting star pattern, the inverted hammer occurs in a price swing low and tends to have a bullish effect.
Basically, in both patterns, the candlestick opens low, trades higher, and closes low near the open — while the shooting star occurs in an upswing, the inverted hammer occurs in a downswing.
One more thing: when a shooting star pattern has no real body — the candlestick opened and closed at the same level around the lower end — it is called a gravestone doji, and it also has a bearish implication, provided it is occurring at the top of a price swing high.
Putting it all together, these are the features that can help you recognize the shooting star pattern:
- The price closes at the lower 1/4th of the candlestick’s range
- It has a small body or may not have at all
- It has little or no lower wick (the nose)
- The upper wick (the tail) is about 2 or 3 times the size of the real body
- It occurs at the top of an upswing
The psychology behind the shooting star pattern
As you know, a candlestick represents what happened in the market during a single trading session, and it is always about the battle between the bulls and the bears to take control of the session.
In every session, the price momentum shifts back and forth between the bulls and the bears, but in the case of the shooting star pattern, the bulls were in control at the initial stages of the session.
The bulls pushed the price high, in continuation with the already existing upswing, and may even drive the price to a new high. But just when the bulls were about to claim victory, the bears stepped in and put up a big fight.
Eventually, they overpowered the bulls and forced the price back down to close around the open price.
If the price closes below the open price, the body of the shooting star pattern will have a bearish color, but if it closes above the open price, the body will have a bullish color — although the pattern may not be as bearish as the one with a bearish body, it still has a bearish effect.
Here is how the bearish effect comes about: When the bears pushed the price lower, those who bought at higher prices find themselves in losing positions.
As the price drops lower, they panic and try to cut their losses by closing their positions, which adds to the selling pressure that pushes the price further down — attracting more bears.
So, the shooting star candlestick pattern is a reversal pattern that implies price rejection at higher prices.
Since the pattern occurs at the end of a swing high, they are often seen around resistance levels, where they indicate a price rejection and a potential downward reversal.
While the pattern can mark the beginning of a trend reversal, it is more preferable to look for it at the end of a pullback in a down-trending market, where it may initiate a new downswing.
Identifying a shooting star pattern in other candlesticks
As you may already know, the shooting star pattern is not the only Japanese candlestick pattern that indicates price rejection and has bearish reversal effects.
Examples of bearish reversal patterns include the dark cloud cover, bearish engulfing pattern, evening star pattern, and bearish harami.
Interestingly, when you analyze some of those price action candlestick patterns, you will notice that they are actually the shooting star pattern split into multiple candlesticks.
In fact, when you move to a higher timeframe that captures the component candlesticks of those patterns as one candlestick, you may notice that they coalesce to a shooting star pattern.
It is, therefore, important that you learn how to read the price action so that you won’t need to memorize the candlestick patterns.
To understand the potential effect of a candlestick pattern, all you need to do is find out where the price closed in relation to the full range of the pattern. Take a look at the examples below:
Dark cloud cover
The dark cloud cover is a two-candlestick pattern where the first candlestick is bullish but the second is bearish and closes below the midpoint of the first.
It shows that the bulls were in control in the first trading session, but sellers took control in the second session, bringing the price down to close near the pattern’s opening price.
Analyzing the pattern shows that it is essentially a shooting star pattern split into two trading sessions.
For instance, a dark cloud cover seen on an M15 chart becomes a shooting star candlestick with a bullish-colored body when you move to the M30 timeframe.
Bearish engulfing pattern
A bearish engulfing pattern is also a two-candlestick pattern where the first candlestick is bullish and the second bearish, but here, the second candlestick completely engulfs the first one and closes below its open price.
The pattern shows that the bulls had the momentum in the first trading session, but the bears wrestled the momentum from the bull in the second session and pushed the price down below the first candlestick’s opening price.
When you check the position of the final closing price with reference to the pattern’s range, you will see that the closing price is around the low of the range, indicating a bearish implication.
Moreover, if you step up to the next higher timeframe that captures the two candlesticks as one — say from M15 to M30 — you will notice that pattern coalesces into a shooting star with a bearish-colored body.
How to trade the shooting star candlestick pattern
You don’t just jump into a short position simply because you see a shooting star pattern at the end of a price advance. Even if it works in a few trades, that is not the right way to trade. If you continue that way, you will have more losing trades than winning ones.
To find high probability trades, you need to create a system that captures the main elements of finding a good trade setup, which includes the following:
- The structure of the market
- Key areas of value
- Trade trigger
The nature price structure
The primary thing you need to consider when you are analyzing a market for trading opportunities is to understand the structure of the market and also decipher what stage of the market cycle you are dealing with.
As you already learned from our previous posts, the market can be in any of these four phases of the market cycle:
- Accumulation phase
- Advancing or mark-up phase
- Distribution phase
- Declining phase
Since the shooting star is a bearish reversal pattern, the best phase to trade it is in the distributive phase or declining phase.
In the distributive phase, the market is usually in a range, so in such a market condition, you can look for the pattern at the upper end of the price range.
The declining phase simply means that the market is in a downtrend. It is a perfect market for trading the shooting star candlestick pattern because of its bearish reversal effect.
What you should do is to look for the pattern at the end of pullbacks in a downtrend, where it can reverse the price and start a new downward swing.
Key price level
Apart from knowing the nature of the market, you need to identify the key price levels or areas of value where you will look for the price action candlestick pattern. These are some of the tools you can use to identify such areas of value:
–Resistance levels: Whether the market is in a downtrend or a range, the resistance level is where an upward price swing reverses and heads downward. So, it makes sense to look for the shooting star pattern at a resistance level
-Trend line: A downtrend line functions like a descending resistance level. The price is likely to reverse when it rallies to the trend line during a downtrend.
–Moving average: The moving average line often acts as a dynamic resistance level in a downtrend. There is a great chance that a pullback can turn back when it hits a long-period moving average line, so looking for a reversal candlestick pattern there is a nice idea.
-Fibonacci retracement levels: These levels show the percentage of the preceding impulse wave the price can retrace to before reversing to start a new impulse wave downward.
-Pivot lines: Derived from the average of the high, low, and closing prices of the previous day, week, or month, major pivot lines are often respected by the price.
The price is likely to reverse at these levels because they are usually known to most traders and there are huge numbers of sell limit orders that can force the price to reverse.
Take a look at the WTI Crude Oil chart below. Can you see the shooting star pattern at the resistance level?
In the AUDUSD chart below, you can see a shooting star at a 200-period moving average line.
Here is where the shooting star candlestick pattern and other similar patterns come in. The pattern is only but a trade trigger that tells you the right moment to enter a trade when every other thing already ticks good — the market condition is favorable for a bearish trade, and the price is at an area of value.
In other words, you have to first identify a downtrend and wait for the price to rally to a resistance level before looking for a shooting star pattern to tell you when to go short, or you spot a ranging market and wait for the price to get to the upper boundary (resistance zone) before looking for a shooting star pattern to trigger a short position.
In addition to this Japanese candlestick pattern, you may also use a downward break of a countertrend line attached across the lows of a pullback to trigger a short position during a downtrend.
Strategies for trading shooting star
From what we have discussed so far, you can deduce that there are a few situations where you can successfully trade the shooting star candlestick pattern. Here are the three of them:
- Pullbacks in a downtrend
- Bearish reversal chart patterns
- The upper boundary of a ranging market
Selling pullbacks in a downtrend
This is a pullback reversal strategy that aims to enter a sell position at the beginning of a new downswing so you will be on the side of the trend.
To trade this strategy, you will need to have a way to know when the price rally is about to reverse to the downside.
Now, you have to employ the second element we discussed above — areas of value. You need to use one of the tools to identify a level where the price is likely to reverse so that when the price gets there, you will then look for signs of weakness in the pullback, which indicates that a downward reversal is around the corner.
This is where your shooting start candlestick pattern comes in. The pattern tells when the price rally is losing momentum, showing that bears have stepped in to drive the price down.
In other words, you use the shooting star pattern to determine when it is safe to go short after all the other conditions are met.
To put it all together, these are the steps to follow:
- Use a trend line or moving average to confirm that you have a downtrend
- Wait for the price to pull back to the trend line, moving average line or a resistance level as indicated by previous price swing points above the current price level — alternatively, attach the Fibonacci retracement tool and wait for the price to retrace to the 50-60 level
- Look for the reversal price action candlestick pattern and go short when the pattern closes
- Place a stop loss a few pips (about 1 ATR) above the swing high
- Put a profit target at the next support level or a 100% Fibonacci expansion level — you can also ride the trend with a trailing stop
In the gold chart below, a shooting star pattern formed at the descending trend line, and the price reversed to the downside. Notice the position of the stop loss and the profit target.
Below is the chart of WTI Crude Oil. The price pulled back to a resistance level and got rejected above it, forming a shooting star pattern. Notice that the level roughly corresponds to the 50% Fibonacci level.
Trading the shooting star candlestick pattern with bearish reversal chart patterns
In this case, you are trying to trade the reversal of an uptrend using a bearish chart pattern but with a shooting star pattern to refine your entry level.
Some of the bearish reversal candlestick patterns you can trade include the head and shoulder pattern, the double top pattern, and the triple top pattern.
The classical method of trading these chart patterns is to enter a short position when the price breaks out below the neckline — the support line connecting the corresponding swing lows in each pattern.
However, with the shooting star or other bearish reversal candlestick patterns, you can enter a trade at the swing high preceding the breakout or at the retest of the breakout level.
In a head and shoulder pattern, a shooting star pattern at the right shoulder may be enough to go short at that level, especially if the price had already made a lower swing low before the right shoulder’s lower swing high — already indicating a potential downward reversal.
Similarly, a shooting star pattern at the second peak in a double top chart pattern or third peak in a triple top pattern might be an indication to go short because those peak levels are already established resistance levels.
For the head and shoulder pattern, the appropriate place for a stop loss is above the head.
In the case of a double top or triple top, the right place for the stop loss is above the highest point in the resistance zone.
When trading this type of setup, you can have two profit targets. The first target would be just above the neckline so that you get something in case the price doesn’t break the neckline and decline further.
The second profit target should be at the classical target for chart patterns — the height of the chart pattern measured at the other side of the neckline.
Bruker Corporation’s stock chart below shows a triple top chart pattern. A shooting star pattern formed at the third peak, creating an early trading opportunity. Notice the positions of the first and second profit targets (TP1 and TP2).
In the gold chart below, you can see a triple top pattern that broke below the neckline and later retested that level, forming a shooting star pattern in the process. That’s a perfect entry point for a short position.
The GBPJPY chart below shows a head and shoulder pattern. Notice the shooting star pattern that occurred at the right shoulder. That would have been an early entry. Note the position of the stop loss
Selling the upper boundary of a ranging market
A ranging market is another good place to look for short positions using the shooting star pattern.
Of course, the right place to find shorting opportunities is around the upper boundary, which is the resistance zone.
Since the price has been reversing downwards at that level, it makes sense to expect the next upswing to reverse at that level.
But you don’t just go short when the price hits that level; you want to see signs that the price is rejected at that level, which means that a bearish reversal might be on the cards.
This is what the shooting star pattern does for you. Thus, when the price is at the upper boundary of the range market, look for the price action candlestick pattern first.
If you see the pattern, you can go short when the next candlestick opens. You place your stop loss above the highest level and put your profit target above the lower boundary.
In the USDCHF chart below, you can see a market in a range. A shooting star pattern occurred at the upper boundary, creating a good shorting opportunity.
Mistakes to avoid when trading the shooting star pattern
Here are the two common mistakes traders make when trying to trade the pattern:
Trading the pattern on its own
Many traders try to trade the shooting star candlestick pattern as a strategy on its own, which is obviously a mistake as it can lead to making so many bad trades.
From our discussions so far, you can see that it’s best to use the pattern as a part of a robust trading strategy, in which case, it tells you when to enter a trade when other factors are in support of the trade.
Going against the uptrend
While you can use the pattern to trade a pullback reversal to the downside, it is more risk to trade a full reversal of an uptrend, except in a situation where there is already a bearish reversal chart pattern and you’re only using the candlestick pattern to gain a better entry.
The shooting star candlestick pattern is one of the most widely traded bearish reversal candlestick patterns.
It shows price rejection at high prices and a bearish shift in momentum. The pattern is best used as a trade trigger in a comprehensive strategy that involves a favorable market structure, area of value, and a trade trigger.