Another widely popular candlestick pattern is called a shooting start. This pattern is both simple and yet at the same time a little bit confusing. On its own this pattern is quite easy to understand.
A shooting star is a bearish reversal signal that forms after or during the final stages of an uptrend. As we said, the shooting star pattern on its own is easy enough to understand. But there is another candlestick pattern that is quite similar to the shooting star and that is the inverted hammer.
In fact, these two patterns are so similar that an inverted pattern is sometimes referred to as an inverted shooting start. This is why in this article our aim is to clarify the definition of the shooting star pattern, its meaning, application, and also clear up any confusion that might exist between it and the inverted hammer.
What Exactly Is the Definition of a Shooting Star?
As we saw, a shooting star candlestick pattern is a bearish reversal signal. As a result, this pattern is almost always seen at the end of an uptrend or at least in its final stages. Therefore, you would usually be able to spot a shooting star at the peak or height of an uptrend. Just before it is about to fall shooting down – no pun intended!
The way this candlestick pattern takes form is that the body of the candle is first and foremost really small. Therefore, this means the opening and closing prices are not that different from each other.
Now, please keep in mind that the body of different candlestick patterns can have different colors. But this will not really change the signal they are about to provide to forex traders.
And as we know, the shooting star pattern is a bearish reversal signal. So if the body of the candle is red, then it means the signal is much more powerful. At the same time, the body can also be green.
The difference between these two body colors is only in the difference between the opening and closing prices. With a shooting star pattern, the open and close are pretty tight with little difference between them in any case. But if the closing price is higher than the opening price or vice versa then it would change the color of the candle body.
Then there is the matter of candle’s shadows or wicks. The shooting star does not have a lower shadow or wick, which means the lowest price registered during the formation of this candle is really close to the opening and closing prices.
So if these three prices are close to one another, where is the difference? Naturally, the key part of the shooting star can be seen in the upper shadow or wick. A shooting star has a really long upper shadow.
Alright, now it is time for interpretation.
What Does the Shooting Star Pattern Tell Us?
The shooting star candlestick pattern registers a really high upper wick. This means there is still a push by traders in the market to buy as a result of the existing uptrend.
But that really high price is not where the candlestick closes. In fact, the closing price, like the opening price, is far lower than the top shadow – hence the existence of the really long top shadow.
The fall of the high price registered back to the lower closing price means there is an initial pressure to sell in the market and there is not enough push left toward the bullish area.
Therefore, when you detect the shooting star candlestick pattern after an uptrend has been well on its way, which is usually where we see prices during a peak or at top, then you can expect a fall toward the bear territory.
But there are also other pieces of information that can be obtained through this candlestick pattern.
Detecting Resistance Level with Shooting Star
Another really important piece of information that can be obtained with the help of the shooting star pattern is the resistance level. This is where the market would register the highest price it is able to do so, before falling head down into the hands of bears in the market.
So when you see the upper wick or shadow of the candlestick pattern registering the higher high, and especially when it is followed by candles registering lower highs and higher lows, then it proves that the upper wick of the shooting star was indeed the new resistance level.
Please also keep in mind that the relationship between these two, i.e. the shooting star pattern and the resistance level, can be seen from both perspectives. This means one can be used to detect and confirm the other and vice versa.
How to Use the Shooting Star in Forex Trading?
As it has been ascertained so far, the shooting star candlestick pattern is a bearish reversal. This means this pattern signals the end of an uptrend and the beginning of a downtrend.
When forex traders can successfully identify and detect this pattern, they then need to adjust their position in the market according to this new information.
Of course there are so many details that go into making a whole position. These details could include factors such as stop loss and also profit goals that you set for your position.
But as a whole, prior to the identification of a shooting star, given the fact that the overall trend in the market was a bullish one, then it can be expected that your main position was long or buy.
Now that you have a signal that anticipates decreases in the value of price of the asset or currency pair, then you need to take a short position and also make adjustments to other values of your position such as your stop loss.
Can a Shooting Star Pattern Be a Bullish Reversal?
No. The end.
If only it were that easy, right!?
While it is true that a shooting star is by nature a bearish reversal signal, there is a lot of confusion between this pattern and another pattern that almost looks exactly identical – and that is the inverted hammer.
As we said at the beginning, an inverted hammer is so similar to a shooting star that some traders call it an inverted shooting star.
But names and terminologies aside, what exactly is the difference between a shooting star and an inverted hammer if they are rather identical?
Shooting Star vs. Inverted Hammer
The case of the shooting star and an inverted hammer is not the only point of confusion in technical analysis with the help of candlestick charts and patterns where we see two very similar patterns.
This happens quite often between different candlestick patterns. The important thing is that you must know the difference.
Although a shooting star and an inverted hammer look exactly the same in their formation, they cannot be any more different.
A shooting star is a bearish reversal, so it will form at the top or height of an uptrend – this is when the uptrend is near its end.
An inverted hammer, on the other hand, is a bullish reversal signal, which means you will see this pattern at the lowest point of a downtrend – this would be the final stages of a downtrend, so it stands lower than its other parts.
A shooting star is a candlestick pattern that signifies the beginning of a bearish trend in the market. As a result, it forms at the peak of an existing uptrend. Forex traders can use this signal to adjust their position in the market and prepare themselves for the upcoming price decrease.