What Does a Shooting Star Candlestick Mean in Stock Trading?

Chances are you’ve wished upon a "shooting star" when seeing a meteor blaze across the night sky, but that’s not the only reference to this term. There’s also a shooting star in the world of trading, which paints an entirely different picture. 

A shooting star candlestick is a critical pattern in technical analysis, signaling potential shifts in market momentum. In this guide, we’ll review what the pattern means, how it differs from an inverted hammer, and how to identify shooting star stocks. We’ll also discuss an example to break down the concept.

What does a shooting star candlestick mean?

The shooting star candlestick is a crucial chart pattern in trading, renowned for its bearish reversal implications. The pattern forms when a security’s price (typically a stock) opens higher than the previous close but then experiences major selling pressure throughout the trading day, finally closing near or below the open price. 

The shooting star pattern resembles a shooting star with a small body situated at the upper end of the trading range and a long upper shadow, at least two times the real body’s length. In contrast, the lower shadow is usually small or nonexistent.

The body’s color in the pattern is not as critical as its shape, but a red or bearish candle may have stronger implications for a potential reversal. What distinguishes the shooting star pattern is its location within a price trend. It typically appears at the end of an uptrend, signaling potential weakness or a reversal in the prevailing market sentiment.

Let’s break down its main characteristics:

Appearance

The shooting star is characterized by a small body representing the price range between the opening and closing prices for the trading day. This body is often situated near the upper end of the day's trading range.

Long upper shadow

A shooting star’s long upper shadow extends well above the body and can be at least two times the body’s overall length. It represents the intraday high reached by the stock before encountering selling pressure.

Small or nonexistent lower shadow

In contrast to the long upper shadow, the lower shadow is typically small or nonexistent, indicating that the price didn't experience significant intraday lows.

Color

While the body’s color (whether red or green) is not a strict determinant of the pattern's validity, a red or bearish body may suggest a stronger potential for a bearish reversal.

Location

The shooting star pattern is most significant when it occurs at the end of an uptrend. This placement signifies that buyers initially pushed the price higher, but sellers ultimately regained control by the close of trading.

(Ready to start trading using technical analysis? Composer can help.)

What does a shooting star candlestick tell you?

The shooting star candlestick highlights a potential price top and imminent reversal from bullish to bearish momentum. This pattern holds several key implications for traders. Here are a few:

Reversal signal

When the pattern emerges, it suggests a potential shift from an upward trajectory to a downward one. It indicates that the buying pressure that initially pushed the price higher has weakened, allowing sellers to regain control and potentially drive the price lower.

Confirmation

Traders often exercise caution and wait for confirmation before taking action based on the shooting star pattern. Confirmation may come from the appearance of a bearish candlestick on the following day or a gap down in prices. These additional signals validate the shooting star's bearish implications and increase traders' confidence.

Risk management

To manage risk, traders often use the shooting star candle’s height as a reference point for setting stop-loss levels. Placing a stop-loss order––which is made with a broker to buy or sell a security when it reaches a certain price––slightly above the shooting star's high allows traders to limit potential losses if the price doesn’t reverse as expected. This helps protect capital and minimizes exposure to adverse market movements.

Context matters

While the shooting star is a powerful signal on its own, its reliability increases when it occurs within a prolonged uptrend. Traders often consider the preceding price action and the overall market conditions when interpreting the shooting star. When this pattern appears after a sustained upward trend, it carries greater weight as a potential reversal indicator. However, in isolation, it may be less reliable.

How to use the shooting star: An example

Imagine you're analyzing a daily price chart of a popular tech company, XYZ Industries, which has been in a strong uptrend for several months. As you scrutinize recent trading sessions, you notice a shooting star pattern emerging.

In this example, the shooting star appears as a small red candlestick with a long upper shadow, occurring at the end of a bullish run. The long upper shadow represents an intraday attempt by buyers to drive the price higher, followed by a significant pullback and a close near the session's low.

To use this shooting star as a trading signal, you'd wait for confirmation in the form of a bearish candle or gap-down opening in the subsequent trading session. This reinforces the bearish sentiment. Traders might consider short-selling XYZ Industries or implementing other bearish strategies, with the shooting star candle as a reference point for setting a stop-loss order.

How to spot resistance with shooting star patterns

To identify resistance, look for a shooting star candlestick with a small real body and a long upper shadow. When this pattern forms near a price level where the stock previously faced selling pressure and struggled to break through, it suggests a strong resistance area. 

The shooting star's upper shadow represents bears pushing the price lower, indicating resistance at that level. Traders often use this pattern, with other technical analysis tools, to identify resistance zones.

Inverted hammer vs. shooting star candlestick

The shooting star and inverted hammer are candlestick patterns in technical analysis, each conveying different signals to traders. Here’s how they are distinct:

Formation and appearance

The shooting star occurs after an uptrend, featuring a small red candle with a long upper shadow. In contrast, the inverted hammer forms at the end of a downtrend, characterized by a small green candle with a long lower shadow.

Market context

Shooting stars signal potential bearish reversals in uptrends, while inverted hammers suggest potential bullish reversals in downtrends.

Interpretation

Shooting stars indicate selling pressure and a shift from bullish sentiment to bearish, while inverted hammers imply buying pressure and a potential shift from bearish to bullish sentiment.

Risk management

Traders often set stop-loss orders below the low of the shooting star for bearish trades, while for bullish trades, they use it above the high of the inverted hammer.

Contextual importance

The reliability of both patterns depends on the context, like the strength of the preceding trend and other indicators. Traders consider these factors when making decisions, using the patterns to inform their overall analysis.

Trade using technical indicators with Composer

Composer can help you identify and capitalize on patterns and other technical indicators. As a cutting-edge trading platform with AI integration, Composer enhances your ability to spot signals and execute strategies. 

To learn more about us, head to composer.trade. Begin your free 14-day trial today.