This upper price momentum continued until one of those bars finally closed above the nine period SMA line. That event served as the exit signal, which would have closed out this trade with a profit. The stop loss on the trade will be set at the high of the price bar that breaks below the trendline. Finally, we will need a way to monitor the price action if it moves in our favor to the downside, and exit the trade when the weight of evidence is pointing to an upside reversal. In this case, we will employ the nine period simple moving average as the mechanism for trailing the price action and issuing our buy exit signal. More specifically, when the price crosses above and closes above this nine period simple moving average line, we will exit the position completely.

Harness past market data to forecast price direction and anticipate market moves. No matter your experience level, download our free trading guides and develop your skills.

How to Trade Forex using the Shooting Star Candlestick Pattern – Strategies and Examples

When a shooting star forms it indicates that the sentiment of the market may be changing at that point in time. The long upper shadow means that buying demand was strong enough to push the price well above the open level. It is a single candlestick with a short body, a long shadow that points up and a small or non-existent lower shadow. The shape and position of the candlestick within a trend is more important than the body color.

When it comes to ascertaining bearish reversals, overbought conditions are of utmost importance. The shooting star pattern appearing as soon as the RSI moves above the 70 levels and into overbought territories should be a warning sign of potential price reversals. It is more effective when it appears after three or more consecutive rising candles that form higher highs.

Walmart Stock Returns to All-Time Highs: Should We Expect Further Growth?

A corrective phase is essentially a price move that occurs against the primary trend. So, if the primary trend is up, then the corrective phase would occur as prices are moving lower. Similarly, if the primary trend is down, then the corrective phase would occur as prices are moving higher. The shooting star can be useful as a sell indicator under certain conditions. On the daily forex charts, it is as a sign, of a potential short term bearish correction. To be classed as a shooting star it should reach or be close to a recent high in the trend that’s forming.

However, it’s essential to remember that no strategy is foolproof, and there are limitations to relying solely on shooting stars for trade decisions. False signals do occur occasionally, which can lead to losses if not managed properly through risk management techniques like setting stop-loss orders or using proper position sizing methods. It’s important to note that there is nothing magical about the nine period simple moving average line. You could just as well use a slightly shorter or longer variation as well. The point is that whichever exit mechanism that you use, you should be consistent in your application of it. A simple yet robust method for trading the shooting star formation as a countertrend setup.

How much is traded in the forex market daily?

Like any other candlestick pattern, the shooting star pattern cannot be used in isolation to make a trading decision. The pattern does not provide accurate insights for trading price reversals on its own. Therefore, it should always be used with other indicators or confirmation candles. All of the above https://g-markets.net/ set-ups resulted in profitable trades, however it is important to note it is best not to make trading decisions based on a single candlestick.

Deepen your knowledge of technical analysis indicators and hone your skills as a trader. Prices are always gyrating, so the sellers taking control for part of one period—like in a shooting star—may not end up being significant at all. The long upper shadow represents the buyers who bought during the day but are now in a losing position because the price dropped back to the open. The Shooting Star is a bearish reversal signal, which means it indicates that the price has reached the top of its current uptrend and will fall soon.

Relative Strength Index (RSI) and Shooting Star Candlestick Pattern

When the same pattern forms at a trend bottom it is called an inverted hammer. Also, the upper wick represents the buyers who were in a strong position during the day, but now they may be losing control because of the price drop. HowToTrade.com takes no responsibility for loss incurred as a result of the content provided inside our Trading Room. By signing up as a member you acknowledge that we are not providing financial advice and that you are making the decision on the trades you place in the markets. We have no knowledge of the level of money you are trading with or the level of risk you are taking with each trade. HowToTrade.com helps traders of all levels learn how to trade the financial markets.

However, the low success rate indicates it cannot be relied on its own to provide accurate reversal signals. Therefore, it is essential to use other indicators and candlestick formations to confirm whether a reversal is about to occur instead of basing all trading decisions on the single candlestick. A shooting star pattern is a powerful candlestick shooting star forex pattern formation that can provide valuable insights into the market’s sentiment and potential reversal points. It is characterised by a single candle with a small body located at the bottom of the overall price range, accompanied by a long upper shadow or wick. The resemblance to a shooting star gives this pattern its intriguing name.

Secondly, the open and close of the candle should occur near the bottom one third of the price range. And also, the body of the shooting star formation should be relatively small. If we analyze our shooting star formation here, we can see that all of these important guidelines have been met. As such, we can confidently label this candlestick as a shooting star pattern. In order to do this, we will need to draw an uptrend line that connects the lower swing points within the rising trend.

• When the price advances and shows a sudden drop, it leaves behind a long upper wick.
• As a result, trading volumes act as an important confirmation criterion in the candlestick reversal pattern.
• In fact, there was so much resistance and subsequent selling pressure, that prices were able to close the day significantly lower than the open, a very bearish sign.
• When trading the shooting star pattern, it’s important to look for confirmation from other technical indicators, use a stop loss, pay attention to the context, and consider the timeframe.

We will be taking a closer look at both of these scenarios in this lesson, but for now, it’s important to understand a few primary characteristics of the shooting star pattern. And that is, that it is a single candle formation with bearish implications and that it occurs after a price rise. Another differentiation is the bullish hammer, which is exactly the opposite of a shooting star candlestick formation. The bullish hammer appears after a price correction or downtrend and indicates a trend reversal towards the upside.

This is arguably the greatest strength of this pattern, and as it is with a hammer, it gives you a clear level to play against. The shooting star pattern is a great tool for novice technical traders due to its simplicity. Spotting a potential shooting star candle is straight forward if traders adhere to the pattern description as explained above. A similar structure is observed with the Inverted Hammer pattern however, the Inverted Hammer relates to a bullish reversal signal as opposed to a bearish reversal signal. This candlestick pattern is often revealed at the bottom of a downtrend, support level or pullback. However, if the bulls manage to raise the quotations above the high of the pattern, the signal to sell will be cancelled, and the upward movement may return.

However, it may also occur during periods of rising prices even if the recent candles were bearish. The appearance of the shooting star candlestick signifies price has topped and is likely to correct and start moving lower. Our second trade example shows a shooting star forex pattern (this time with a red body), which formed right at the high of a bullish trend before a strong reversal lower followed. It’s important to note that while shooting stars can be powerful reversal signals, they do have limitations. They are most effective in trending markets rather than ranging ones and should always be used alongside other technical analysis tools for confirmation.

On the price chart above you can see that the price action was moving higher. Notice how the market is making higher and higher swing lows, and making higher and higher swing highs as well. At some point during the uptrend, the momentum behind price action began to wane. This can be seen by the overlapping price action leading up to the shooting star candle. As the shooting star pattern comes close to a resistance level or a trend line, it can confirm the onset of a new bearish bias. It can act as a reasonably reliable pattern to identify a bearish reversal when it appears close to a resistance level.