A shooting star is a reversal candlestick pattern that forms after an uptrend. It has a small body with a long upper shadow and little lower shadow, indicating a potential trend reversal because of strong selling pressure. The shooting star is actually the hammer candle turned upside down, very much like the inverted hammer pattern. The wick extends higher, instead of lower, while the open, low, and close are all near the same level in the bottom part of the candle.
The difference is that the shooting star occurs at the top of an uptrend. It’s a bearish chart pattern as it helps end the uptrend. The inverted hammer, on the other hand, is a bullish chart pattern that can be found at the bottom of a downtrend and signals that the price is likely to trend upward.
In general, the longer the wick the stronger the reversal. Some traders prefer to wait and see whether the next candle is a bearish one, which will confirm that the reversal is taking place.
What a shooting star will show us
As outlined earlier, a shooting star is a bearish reversal pattern that signals potential change in the price direction. The uptrend is nearing its end as the momentum is weakening, and the sellers are feeling more confident that they can force a reversal in price action.
For this reason, a shooting star candlestick pattern is a very powerful formation. Its shape gives the pattern a lot of attention as the wick always sticks out from the rest of the price action. This is especially the case when the wick of a shooting star is also the new short-term high.
Therefore, the shooting star’s key strength is its ability to generate a reversal signal. Of course, it may not always be right, but it is considered to be effective and reliable. However, please note that this is still one signal generated by one of hundreds of technical indicators.
How to trade the shooting star pattern
Trading the shooting star formation is similar to trading a hammer. The focus is on the candle itself, especially its wick that extends higher. In the example below, we see a LTC/USDT chart that moves in an uptrend.
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As is shown in the day chart, the price of LTC touched a periodical high of around $147 and formed a shooting star pattern. If you only look at this candle, the situation looks very positive for the bulls, as there is an uptrend in action and the new high has just been posted. However, the situation quickly changes. The price action moves higher again in the session, fails to create a new high, and reverses to close at the low of the session. As a result, a shooting star candle is formed. Since then, the token price has turned downward, meaning $147 makes a perfect selling point for short-term and mid-term traders.
Summary
A shooting star is a single-candle bearish pattern that generates a signal of an impending reversal. Similar to a hammer pattern, the shooting star has a long shadow that shoots higher, while the open and close are near the bottom of the candle. It is considered to be one of the most useful candlestick patterns due to its effectiveness and reliability. Stay tuned with Toobit Academy for more useful charting tutorials and trading workshops.
