What is a Shooting Star Candlestick Pattern?

Candlesticks usually 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, as in this case, Bearish – 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.

Hence, the shooting star candlestick, usually represented by the colour red to signify its bearish nature, 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.

How to Identify 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. The shooting star candlestick 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 notion of the market

How to trade using a Shooting star candlestick?

You may come across a range of candlesticks when trading, and knowing the types of candlesticks isn’t enough; you have to know what to do with them. When you observe a general upward trend in the market, a shooting star could appear somewhere around the peak, the next trading day's closing price would confirm your suspicions of an upcoming price fall.

This is where you can take a short position and sell your holdings now to repurchase them with more purchasing power when the market dips. This is when the bearish market becomes your friend. After a downward trend in the market, a hammer candlestick can be a good indicator to repurchase those securities and benefit from a potentially bullish market run.

Conclusion

Shooting star candlesticks are easily identifiable even in a larger or more detailed graph due to their distinct features such as the short body and long upper-tailed wick. They are useful in not only understanding and visualising trends and current behaviour, but also in predicting potential market trends and direction.

A Shooting star candlestick 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!