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Important information about how an asset’s price will move in the future may be found in candlestick patterns. The likelihood of success can be raised by correctly understanding these patterns as soon as they emerge and by recognizing them.
We’ll examine the shooting star, one of the most significant single candlestick formations, in this post. We will be examining the shooting star pattern and its meaning, as well as how to organize a trade around it.
A shooting star candlestick pattern: what is it?
A single candlestick with a little body at the bottom and a lengthy top shadow makes up the shooting star candlestick design. The candle’s lengthy top shadow has to be at least twice as long as its body. It is a bearish reversal indication, which means that when it appears, the trend often turns from bullish to negative.
Relevance of the Shooting Star Designation
For traders, the shooting star pattern is extremely important. The candle, which can be either green or red, typically emerges at the peak of an upward trend. The price opened lower and closed higher if the body of the candle is green. A red body indicates a higher opening price and a lower closing price. On the other hand, the lengthy upper shadow represents a failed attempt by the bulls to drive the price higher.
When a shooting star candlestick appears during an uptrend, it basically indicates that sellers were able to join the market and apply enough pressure to force prices lower despite efforts to push prices upward. Traders sometimes see this as a warning indicator and take advantage of the situation to start fresh short positions in anticipation of a trend reversal or to square off their current long bets.
Having said that, there’s something to consider. A shooting star with a red body is frequently seen as a greater predictor of trend reversal than one with a green body, even though the pattern itself is more significant.
What Distinguishes the Inverted Hammer from the Shooting Star Candlestick Pattern?
The shooting star is a bearish reversal Shooting star candlestick pattern that typically emerges near the top of an uptrend, as you have seen in the preceding section. What happens, if the candle emerges at the base of a decline? The inverted hammer design is just that.
With a lengthy top shadow and either a red or green body at the bottom of the candle, the inverted hammer design visually resembles the shooting star. It is a bullish reversal pattern that suggests a possible trend change from bearish to positive when it emerges during a downturn.
How Can the Shooting Star Pattern Be Exchanged?
When trading the shooting star candlestick pattern, there are three things you should pay close attention to: the entry point, the stop-loss, and the profit goal. This is the best way to trade this pattern.
Point of Entry into the Trade
To maximize your trading profits, it is imperative that you enter a position at the appropriate moment. The shooting star pattern typically signals the beginning of a short position for some risk-aggressive traders. This might be quite dangerous, though, as the market might not actually reverse and instead continue its upward run.
Alternatively, and rather more cautiously, one might confirm the trend change from bullish to bearish by entering a short position. The reversal is considered verified if the candle that comes after the shooting star turns red. You are now able to short the asset. The shooting star’s low must be less than the price at which you take the position.
To be even more cautious, you might hold off on shorting the asset until a crucial support level is broken following the shooting star candle’s creation. This method gives the deal one more level of confirmation.
Trade’s Stop-Loss Point
The fluctuations in the market might be quite erratic. Putting in place a strong stop-loss is essential for risk management and capital preservation in the event that the market swings against your position.
Your trade’s optimal stop-loss level should be somewhat above the shooting star candlestick’s peak.
This provides you with a small cushion against small price movements, keeping your stop-loss from being activated too soon. If there is no reversal and the bullish trend continues, your stop-loss will be activated if the price rises over the pattern’s peak.
As an alternative, you might set your stop-loss level in close proximity to either the closest resistance level or the most recent high.
Trade’s Profit Objective
Establishing a profit objective for your trade is crucial because it allows you to seize your gains and pull out of the transaction before the market has an opportunity to turn against you. The asset’s closest critical support level would be the perfect profit target point. You have to square off the position and quit the trade as soon as the asset’s price approaches or reaches the critical support level.
Utilizing Fibonacci retracement levels to pinpoint probable locations for price retracements or reversals is another substitute technique. After you’ve determined these potential reversal points, you might enter your square-off trade at or close to these levels.
Conclusion
One of the best indicators of a bearish trend reversal is the shooting star candlestick pattern. It’s important to keep in mind, though, that the pattern’s existence does not imply a change in the direction of the market. As such, you should always wait for confirmation of the reversal from other technical indications or patterns before acting on a shooting star signal.
For example, you may search for other indicators of weakness, including a divergence in the Moving Average Convergence Divergence (MACD) that is bearish. Only after verifying the reversal may one consider shorting the asset. In this manner, you may stay away from misinterpreting cues.
