When novice traders start their Forex trading journey, they get bombarded with all kinds of information related to trading, such as chart patterns, indicators, signals, and more. Among them, one of the most common chart patterns that are widely used for spotting price reversals is the Shooting Star pattern, but exactly what is Shooting Star? Let’s find out.
Shooting Star Definition
Shooting Star is a candlestick pattern that forms at the top of an uptrend and signals trend reversal. It’s a single candlestick pattern that has a small body, a very long upper shadow, and a non-existent or very small lower shadow. It shows that the asset had an upswing throughout the day but still closed around the same price as the opening price.
Why is the Shooting Star important for traders?
- Understanding Shooting Star in trading can help traders place orders with great risk to reward ratios.
- It is an easy to spot pattern as it forms at the top of an uptrend. And therefore even beginner traders can use it to their advantage.
- Shooting Star is a trend reversal candlestick pattern, which means traders can better position themselves and manage active orders when they stop the pattern forming.
- Shooting Star can be used in combination with various analytical tools.
Thorough Shooting Star explanation
Shooting star is a bearish candlestick pattern that presents itself after an uptrend. It has a very small real body, long upper shadow, and little to no lower shadow. For a candle to be considered a Shooting Star, it also needs to follow some rules. Firstly, the distance between the top shadow and the opening price should be double the size of the real body. In addition, the next candle must stay below the high of the Shooting Star, and it should close lower than the Shooting Star. If these criteria are present, then we can confidently say that we have Shooting Star on our hands.
Just like any other candlestick or chart pattern, it is best to use Shooting Star in combination with other indicators. Keep in mind that the pattern is purely technical and doesn’t take into account economical and political turmoils that can affect the currency valuation.
Example of Shooting Star in Forex
Now let’s look at the Shooting Star example to better understand what it means. As you can see from this US Dollar vs Canadian Dollar example, the pair experienced a strong local uptrend. The uptrend was followed by a shooting star. In this Shooting Star example, a trader should wait for the candlestick pattern to fully close and only place an order afterward. As you can see the shooting star has a small body with a long upper shadow. It means that bulls tried to take the price higher, failed and later bears took the initiative. Stop loss can be placed right above the shadow, which gives traders a great risk to reward ratio.
FAQs on Shooting Star in trading
Is Shooting Star bullish?
No, Shooting Star is a bearish chart pattern. The pattern forms at the top of an uptrend and reverses a trend. It is an easy-to-spot pattern that every trader can easily use.
Is the Shooting Star a reversal indicator?
Yes, Shooting Star shows itself after there is an uptrend in the market, and then buyers are overtaken by the sellers. In order to make sure that the reversal is coming, some traders wait for the confirmation candle to form afterwards the shooting star and enter the trade.