How to use shooting star candlestick patterns

In Trading

The shooting star is common candlestick that indicates the potential for a bearish reversal.

This candlestick is characterized by a small body with a long upper wick and a short or nonexistent lower wick.

 In order to be classified as a shooting star, the upper wick of the candlestick should be at least twice as long as its body, like so:

The shooting star candlestick looks very similar to the inverted hammer candlestick. The defining difference is that shooting stars are bearish reversal signals at the top of of uptrends, while inverted hammers are bullish reversal signals at the bottom of downtrends.

Market psychology of a shooting star candlestick

A shooting star candlestick usually appears at the end of a bullish uptrend with at least two consecutive bullish candles. The shooting star’s long wick is caused by bulls getting heavily rejected at a price with a significant amount of sellers looking to fill orders.

Shooting stars can often be found at historical points of resistance where bearish traders may place large order blocks.

Without adequate bullish momentum, last-minute FOMO buyers end up filling the bearish orders and pushing the body of the candle back down.

When bullish momentum dries up, the candlestick closes near its opening price and a shooting star is formed. Upon confirmation of a subsequent bearish candle, the market reverses to the downside.

Examples of shooting star candlesticks

A shooting star candlestick can be seen at the top of the bullish uptrend in the BTC/USD daily chart below:

Notice the consecutive bullish candles indicating strong buy-side volume.

When prices reaches USD11,800, which happens to be a previous level of resistance, the bears step in and push price downward.

As a result, a shooting star with a very long upper wick is formed and price reverses to the downside.

But a shooting star doesn’t always indicate a true bearish reversal. On the XRP/USD 15m chart below, the highlighted shooting star candlestick is heavily rejected at USD0.361 area.

The extremely long upper wick suggests that bears have managed to gain control over the bulls. In this case, a bearish reversal does does occur, but it’s short-lived.

Within an hour, the bulls finds enough support at the USD0.355 level to kickstart one more leg to the upside.

This final example of shooting star candlestick is found on the BCH/USD 15-minute chart. At USD163, bulls start to lose momentum, and this is reflected in the presence of a shooting star followed by a bearish candle.

After two more successful attempts to break this level of resistance, BCH collapses into a bearish dump to USD153.50.

Conclusion

Like their inverted hammer cousins, shooting star candlesticks can be useful when identifying potential price levels to sell a long position or to open a short position.

However, as you can see in the examples above, shooting stars do not provide a definitive signal for bearish reversals.

In real-world cryptocurrency trading, shooting stars should be used with other signals like RSI divergence, EMA crossovers, pivot points and other indicators.

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This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.

WRITTEN BY

Liquid

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