The shooting star Candlestick Pattern

The shooting star is the last single candlestick pattern that we will learn about before we move to multiple candlestick patterns. The price action on the shooting star is quite powerful, thus making the shooting star a very popular candlestick pattern to trade.

The shooting star looks just like an inverted paper umbrella.

Unlike a paper umbrella, the shooting star does not have a long lower shadow. Instead it has a long upper shadow where the length of the shadow is at least twice the length of the real body. The colour of the body does not matter, but the pattern is slightly more reliable if the real body is red. The longer the upper wick, the more bearish is the pattern. The small real body is a common feature between the shooting star and the paper umbrella. Going by the text book definition, the shooting star should not have a lower shadow, however a small lower shadow, as seen in the chart above is considered alright. The shooting star is a bearish pattern; hence the prior trend should be bullish.

The thought process behind the shooting star is as follows:

• The stock is in an uptrend implying that the bulls are in absolute control. When bulls are in control, the stock or the market tends to make a new high and higher low
• On the day the shooting star pattern forms, the market as expected trades higher, and in the process makes a new high
• However at the high point of the day, there is a selling pressure to an extent where the stock price recedes to close near the low point of the day, thus forming a shooting star
• The selling indicates that the bears have made an entry, and they were actually quite successful in pushing the prices down. This is evident by the long upper shadow
• The expectation is that the bears will continue selling over the next few trading sessions, hence the traders should look for shorting opportunities

Take a look at this chart where a shooting star has been formed right at the top of an uptrend.

The OHLC data on the shooting star is; open = 1426, high = 1453, low = 1410, close = 1417. The short trade set up on this would be:

1. The risk taker will initiate the trade at 1417, basically on the same day the shooting star forms
   1. The risk taker initiates the trade the same day after ensuring that the day has formed a shooting star. To confirm this the trader has to validate:
      1. If the current market price is more or less equal to the low price
      2. The length of the upper shadow is at least twice the length of the real body
   2. The risk averse will initiate the trade on the next day, only after ensuring that the 2nd day a red candle has formed
2. Once the trade has been initiated, the stoploss is to be placed at the high of the pattern. In the case the stop loss is at 1453

As we have discussed this before, once a trade has been set up, we should wait for either the stoploss or the target to be triggered. It is advisable not to do anything else, except for maybe trailing your stoploss. Of course, we still haven’t discussed about trailing stoploss yet. We will discuss it at later stage.

Here is a chart where both the risk taker and the risk averse would have made a remarkable profit on a trade based on shooting star.

Here is an example, where both the risk averse and the risk taker would have initiated the trade based on a shooting star. However the stoploss has been breached. Do remember, when the stop loss triggers, the trader will have to exit the trade, as the trade no longer stands valid. More often than not exiting the trade is the best thing to do when the stoploss triggers.

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Note;-

1. A paper umbrella has a long lower shadow and a small real body. The lower shadow and the real body should maintain the ‘shadow to real body’ ratio. In case of the paper umbrella the lower shadow should be at least twice the length of the real body
2. Since the open and close prices are close to each other, the color of the paper umbrella should not matter
3. If a paper umbrella appears at the bottom of a down trend, it is called the ‘hammer’
4. If the paper umbrella appears at the top end of an uptrend, it is called the hanging man
5. The hammer is a bullish pattern and one should look at buying opportunities when it appears
   1. The low of the hammer acts as the stop loss price trade
6. The hanging man is a bearish pattern which appears at the top end of the trend, one should look at selling opportunities when it appears
   1. The high of the hanging man acts as the stop loss price for the trade
7. The shooting star is a bearish pattern which appears at the top end of the trend. One should look at shorting opportunities when a shooting star appears
   1. The high of the shooting star will be the stop loss price for the trade.

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