Shooting Star

Shape:

  • The shooting star is a bearish reversal candlestick pattern that forms after an uptrend.
  • It has a small real body near the low of the period, with a long upper shadow and little to no lower shadow.
  • The long upper shadow indicates that the price attempted to rise significantly but faced strong selling pressure, pulling it back down near the opening price.

Success Rate:

  • The shooting star pattern has a moderate success rate as a reversal indicator.
  • Success rates can vary, but the pattern is generally considered reliable when it appears after a strong uptrend and is confirmed by subsequent price action.
  • Studies suggest that the success rate of the shooting star in predicting a downward reversal can be around 60-65%.

Sell:

  • Enter a sell position when the price moves below the low of the shooting star candle in the following period.
  • Confirmation with increased volume strengthens the reliability of the sell signal.

Take Profit (TP):

  • Set the take profit target based on recent support levels or a predetermined risk-to-reward ratio.
  • Example: If the shooting star forms at Tk.100 and the next significant support level is at Tk.90, consider setting your take profit around Tk.90.

Stop Loss (SL):

  • Place the stop loss above the high of the shooting star to limit potential losses if the reversal fails.
  • This helps protect your capital if the price continues to rise despite the bearish signal.

Buy:

  • Consider buying if the shooting star pattern fails, and the price moves significantly above the high of the shooting star candle, indicating continued bullish momentum.
  • Alternatively, buy when the price reaches a strong support level after the reversal, indicating potential for a bullish rebound.

Profit Trailing:

  • Use a trailing stop to secure profits as the price moves in your favor.
  • Adjust the stop loss level downwards as the price falls, keeping it a set distance (e.g., a percentage or taka amount) above the current price.

Lot Size:

  • Determine the lot size based on your risk tolerance and account size.
  • Ensure that the potential loss (difference between entry price and stop loss) does not exceed a predetermined percentage of your account balance (e.g., 1-2%).

Risk-to-Reward Ratio:

  • Aim for a favorable risk-to-reward ratio (e.g., 1:2 or higher), where the potential reward is at least twice the potential risk.

Leverage:

  • Use leverage cautiously. While leverage can amplify gains, it also increases potential losses. Ensure you have a clear understanding of how leverage works and its impact on your trades.

Other Conditions:

  • Confirm the shooting star pattern with increased volume and subsequent bearish price action.
  • Monitor overall market conditions and sentiment to ensure alignment with the bearish outlook.

Caution:

  • False signals can occur, leading to potential losses. Always wait for confirmation before entering a trade.
  • Market volatility and external factors can influence the pattern's reliability.
  • Avoid trading shooting stars in a strong bullish market, as the success rate may decrease.

Pros and Cons of the Shooting Star Pattern

Pros:

  1. Reversal Indicator:

    • The shooting star is a reliable indicator of a potential reversal, especially when confirmed by subsequent bearish price action.

  2. Clear Entry and Exit Points:

    • The pattern provides clear levels for entry (below the low of the shooting star) and exit (above the high of the shooting star), simplifying trade planning.

  3. Easy to Identify:

    • The distinct shape of the shooting star makes it easy for both novice and experienced traders to recognize.

  4. Volume Confirmation:

    • The pattern's reliability increases when accompanied by high trading volume, providing additional confirmation of the bearish signal.

Cons:

  1. False Signals:

    • The shooting star can sometimes lead to false signals, where the price does not reverse as expected. This can result in losses if not managed properly.

  2. Volume Requirement:

    • Successful identification often requires confirmation with increased volume. If the pattern occurs on low volume, it might be less reliable.

  3. Market Conditions Dependency:

    • The pattern's effectiveness can diminish in a strong bullish market. It is most reliable in overextended or overbought conditions.

  4. Subjectivity:

    • Interpreting the size and position of the candlestick's shadows can be somewhat subjective. Different traders might have slightly different interpretations.

  5. Time Frame Variability:

    • The pattern can form over various time frames, from minutes to days. The reliability and interpretation might differ based on the time frame, requiring traders to adapt their strategies accordingly.

Trading Psychology of the Shooting Star

Formation:

  • Initial Uptrend: The pattern typically forms after a sustained uptrend. Traders are optimistic, and buying pressure is strong.
  • Long Upper Shadow: The long upper shadow indicates that the price attempted to rise significantly but faced strong selling pressure, pulling it back down. This suggests that buyers are losing control, and sellers are gaining strength.

Market Sentiment:

  • Buyers' Exhaustion: The appearance of the shooting star signals that buyers may be exhausted, and the uptrend is losing momentum.
  • Sellers' Confidence: The strong selling pressure that creates the long upper shadow indicates growing confidence among sellers that the price will fall.

Breakout Psychology:

  • Anticipation: Traders who recognize the shooting star anticipate a bearish reversal. They prepare to enter sell positions upon confirmation of the pattern.
  • Volume Increase: A significant increase in trading volume during the formation of the shooting star confirms that more traders are participating, reinforcing the bearish sentiment.
  • Fear of Reversal: As the shooting star forms, more traders may rush to sell, fearing that the uptrend is over and the price will drop. This further drives the price down.

Post-Pattern:

  • Validation: Successful validation of the shooting star (price moving below the low of the candle with increased volume) reassures traders that the pattern is legitimate. This leads to sustained selling interest.
  • Profit-Taking: Some traders might take profits near the target price derived from recent support levels. However, the overall sentiment remains bearish unless significant support is encountered.
  • Trailing Stops: Experienced traders use trailing stops to lock in profits while allowing for further downside potential. This approach balances profit-taking with the possibility of continued price decrease.

Failure and Risk Management:

  • False Signals: Not all shooting stars succeed in predicting a reversal. False signals can occur, leading to trader frustration and potential losses. Proper risk management, such as stop-loss orders, is essential.
  • Reevaluation: If the pattern fails, traders reassess their strategy. They might look for other patterns or signals to guide their next moves.

General Tips for Managing Trading Psychology:

  • Patience: Wait for confirmation before entering a trade to avoid false signals.
  • Discipline: Stick to your trading plan, including predefined entry, exit, and stop-loss levels.
  • Emotional Control: Manage emotions like fear and greed by focusing on your strategy and risk management principles.
  • Continuous Learning: Stay informed about market conditions and continuously improve your technical analysis skills.

Understanding the psychology behind the shooting star can help you make more informed trading decisions and better anticipate market movements.