If you trade based on technical analysis, you might have come across the phrase ‘shooting star pattern‘ Well, in case you haven’t, we are here to tell you what a shooting star pattern is and how you can use it.
A shooting star pattern is used in technical analysis as a reversal pattern that presages a falling price. Surprisingly, the shooting star pattern looks exactly like an inverted hammer. Despite its shape, it is found in an uptrend.
This article will tell you all you need to know about the shooting star pattern, including its definition, uses, interpretations, and examples.
What is the Shooting Star Pattern?
Price action trading strategies generally aim at the movements of the market based upon previous fluctuations in the price. With the information obtained, you, as a trader, can decide on the asset direction.
Price action trading considers different technical analysis tools like price bands, high and low swings, and charts. These charts make it easy for you to observe the market.
Now, to make it more clear, a shooting star pattern is a technical analysis pattern that appears in candlestick charting. A shooting star pattern is known to be a bearish candlestick formation. This pattern occurs only in instances where security has opened and advanced significantly.
A shooting star pattern is branded by a small or no lower shadow and a long upper shadow. It also has a reduced real body near the low of the day.
Always remember that the formation of the candlestick has to occur in the middle of a price advance for it to be considered a shooting star.
Interpretation of the Shooting Star Pattern
Here is what the shooting star pattern tells you:
- It indicates a potential reversal and price top.
- If the shooting star pattern appears after a series of three or more candles that are rising with higher highs, that’s when the shooting star pattern is most effective.
- When a shooting star rises, it shows the exact pressure of buying seen over the last several periods.
- The long upper shadow represents the buyers who bought during the day and are now losing due to the price dropping.
- The price range of the shooting star pattern may still be perceived as a resistance if the price continues to rise after the shooting star.
Given below is an EOD chart of Cisco Systems. This chart illustrates an example of the shooting star pattern taking place. It also shows how the formation correctly presages a downside turn.
A shooting star pattern at the top of a continuous uptrend resulted in a sustained downward move
When to Use a Shooting Star Pattern?
By now, you must have realized that a shooting star pattern is beneficial if you are looking to initiate a fresh short position in the market.
You can either sell futures or buy puts or sell calls when the shooting star pattern is observed. Validate it with other bearish patterns for better confirmation
The shooting star pattern also indicates when to close your long positions.
Just like many other price action trading strategies, the shooting star pattern is an important trading tool in the world of trade. It is one of the simplest systems to use, observe and notice.
Although it is relevant to couple the shooting star formation with technical analysis, it remains quite effective.