Stock Chart Trading: Shooting Star

Shoot for the star with the shooting star pattern! (cringe)

The shooting star is another red flag for traders. As with a shooting star, the price will usually go down when this pattern appears. Thus, this pattern is what we can call a bearish pattern. The Shooting Star pattern is a technical chart pattern that occurs when the price of an asset (like a stock, currency, or commodity) opens high, then trades much lower throughout the day, but closes near its opening price.

Traders and investors may use the Shooting Star pattern as a signal to sell or take profits on their long positions or to potentially enter short positions. However, it’s important to note that the Shooting Star pattern should not be relied upon solely, and other technical and fundamental analyses should be considered before making any trading decisions.

Characteristics of The Shooting Star

Honestly, a shooting star looks much like Thor’s hammer when Thor had to lift it off the ground, but can’t — it’s sad that they missed the chance to call it a reluctant Mjolnir, but enough with that — here are how you can identify a shooting star pattern:

Appears during an uptrend.
Short body.
Long upper tail — twice or more than the size of the body.
No lower tail (but usually a little unremarkable lower tail is still acceptable).
The color can be red or green, but red is more convincing.

What does the shooting star tell you?

A shooting star appears when the market is up, whereby you can say that the market sentiment is bullish.
On the day that it appears, the long upper tail indicates that there was an attempt to continue the rally, people tried to push the price up, but failed, as the price closed significantly lower.
What that meant is the bullish sentiment has weakened, the buying mood is down, and there is a chance that the bearish sentiment may kick in.
Simply, it’s a sign that the uptrend is losing steam and may be looking to fall. If it’s in a marathon it’s like when you see someone looking as pale as ice — they can continue running, of course, but medics would’ve been ready with their stretcher at any moment for the dude.

How to trade?

There are generally two ways in which you can approach a trade, by playing it risky or by being risk averse.

Risky:

If you’re a risk-taker, what you can do is buy at D2’s closing price (when the market nears closing time). However, be sure to observe these two conditions — first, the price nearing the close of D2 is higher than D1’s open; and second, D2 opens lower or the same as D1’s closing price.

You can put your stop loss at whichever point is the lowest point that the price moved to within the two days (not open or close price). Say, if the bottom tail in D1 is the lowest point at $100, then you put your stop loss at $100.

Risk Averse:

If you’re a risk-averse trader, then you might want to wait until it’s near the closing time of the next day to see if the price on the third day is in fact bullish. If it is, then you might want to buy it before the market closes.

Just like when going risky, you can put your stop loss at whichever point is the lowest point that the price moved to within the two days (not open or close price). Say, if the bottom tail in D1 is the lowest point at $100, then you put your stop loss at $100.

However, given that you’re buying on the third day, you might want to be prepared to buy at a price higher compared to if you bought on the second day (D2).

Bottom line

Shooting star is a bearish pattern that would appear at the top of an uptrend.
It is identified by a long upper tail and short body, with no lower tail.
Traders would use this pattern as a sign to start short selling or to start taking a profit.
A risky trader would trade the same day, while a more risk-averse trader would wait to see if the closing price the day after is red.

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None of the material above or on our website is to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument. Investors should carefully consider if the security and/or product is suitable for them in view of their entire investment portfolio. All investing involves risks, including the possible loss of money invested, and past performance does not guarantee future performance.

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