Shooting star is a single candle stick pattern which indicates a reversal signal of an uptrend. The prerequisite to a valid shooting pattern is that it should appear after a stock is in strong uptrend.
How Paper Shooting star looks like?
What is the psychology behind formation of Shooting star?
- The bulls are in full control of the stock and taking the stock higher.
- The stock is daily inching higher and leading the investors handsome returns.
- On the shooting start day, the stock hit another high but suddenly reverses back as bears took control of the situation and selling pressure emerges. The stock falls back and ended the day at day’s low.
- The validity of reversal pattern will be confirmed the next day if the stock start trading below previous day low (shooting star day).
- Higher the upper wick better will be the probability of stock reversing and changing the trend downward.
Significance of Shooting star
Emergence of this pattern suggest a reversal to earlier uptrend. The important point to discuss here is that the color of candle does not make any difference. Lets understand its importance through technical charts:
- This is an example is of Tata Consultancy services (TCS) with a stock is in an uptrend, Shooting Star emerges on the chart and stock reverses its direction. It is acting as a reversal signal.
This chart clearly states that shooting star has really reversed the uptrend and resulting in deep correction of TCS stock.
- Second example is of Bajaj Electrical stock with a stock is in an uptrend, Shooting Star emerges on the chart and stock reverses its direction. It is acting as a reversal signal.
- The conclusion one can make is color of the candle is irrelevant.
How to use the pattern effectively?
Shooting star as discussed is a reversal pattern and can be used effectively in the following manner:
- If you have already bought a stock at lower price and stock is in uptrend, Shooting star pattern are really useful to trader as he can sell the stock at current market price on emergence of this pattern. This will result him to book good profits. Since this is a reversal pattern and guide to exit trade.
- You can initiate a fresh short in the stock on next day of shooting star after stock start trading below the previous day low (shooting star day) better at 3.20 P.M . After receiving confirmation that the candle emerges on next day is red in color that indicates bearishness. The stop loss will be the highest prices of the shooting star candle.