Shooting Star Candlestick Pattern and Types
Candlesticks present data for adequate technical analysis and highlight a few things about the market for that particular day or time. The stock market is either indecisive (Doji Candlestick), Bullish (Hammer Candlestick) or Bearish, as in this case, the Shooting Star Candlestick.
The Shooting Star Candlestick occurs when the opening price for a security is higher than the closing price and the positive fluctuation (the highest price for that day) is greater than twice the difference between the opening and closing figures. The lowest price for the day is either the closing price or lower.
Therefore, the shooting star candlestick, usually represented by the colour red to signify its bearish nature. It has a small body with an extended wick above the body and either a small or absolutely no wick stemming below the body of the candlestick.
The common reason for this particular shape of the shooting star candlestick is when the market opens, the bulls drive the market up through their purchasing power. They soon meet with the bears who begin selling the securities when they’ve reached a particular peak price. The bears can overpower the bulls as they’re selling in greater quantities and hence the closing price of the security is lower than the opening.
The disadvantages of the Shooting Star Candlestick
The disadvantages of leveraging this pattern include:
- The dynamic nature of the market means one candlestick may be insufficient evidence of an oncoming bearish victory; it requires further confirmation.
- After short declines, the market may continue to rise with long term and historical upward trends. This makes it vital to use stop losses when using candlesticks.
- Shooting-star candlesticks alone aren’t conclusive indicators of market direction. They are more likely to be accurate predictors when paired with other forms of technical analysis.
Example of Shooting Star candlestick pattern
A shooting star candlestick can be recognised as a small-bodied candlestick with a long wick on the top and little to no wick on the bottom. This pattern usually occurs after an advance or upward trend in the market and signifies a potential fall in the market.
It is important to note that some shooting star candlesticks patterns may be deceiving and present themselves with the colour green suggesting the market opening price was lower than the closing price, these are bullish Shooting star candlesticks also known as inverted hammer candlesticks. Considering all the other elements such as the long wick on top, sized greater than twice the length of the candle body, and the little to no wick at the bottom, you can still recognise a shooting star candlestick and predict the possible downward motion of the market.
Conclusion
While this candlestick pattern is useful to understand and visualise trends and current behaviour, it is not a perfect indicator of market flow and hence should be used alongside other functions of technical analysis when basing your investment decisions. Opening a trading account with IIFL provides you with the benefit of having a wide range of tools for both, fundamental and technical analysis, right at your disposal.
Detailed analytical reports, account management and advisement functions aid even newer traders in building and leveraging a strong portfolio according to their risk appetite. Open your trading account with IIFL today to (re)start your financial journey, the right way.
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Frequently Asked Questions
The Shooting star pattern and Inverted Hammer pattern are both bearish reversal patterns. The main difference between both patterns is that while their shapes are quite similar, they form in different market conditions. A shooting star can form when security (stock, bond or ETF) is trending downward and then gaps down on an ex-dividend date or earnings announcement.
An inverted hammer that forms during an uptrend usually has a long lower shadow with little or no upper shadow. This formation shows exhaustion among bulls after several days of sideways action following strong upward momentum. It tells you when too many buyers entered positions too quickly at higher prices without letting sufficient time pass for bears to step in and push prices back down. While there is more overlap than differences between these two patterns, they behave similarly. But one tends to form during downtrends and the other during uptrends.
The shooting star pattern is a bearish candlestick pattern that traders will recognize immediately. It’s one of several candlesticks patterns used in technical analysis, which are charts that look at historical trading data to predict future trends. The shooting star forms when a stock makes a sharp downward move but then doesn’t close lower than its opening price.
The shooting star pattern is also called a bearish engulfing signal or a bearish reversal candlestick pattern. When you look at it in real time action, an investor may lose money if they enter at that point and time. They may be triggered to exit their long position or vice versa with their short position for them not to lose more money.