Shooting star trading strategy
In this article, we will discuss what the shooting star pattern is, how to recognize it, and how you can use it in your trading. Let’s get started!
Inside Trend System
2020-08-17 • Updated
Information is not investment advice
Let’s discuss the effective strategy, which presents the mix of best ideas of well-known traders such as Larry Williams, Ralph Elliott and Alexander Elder. Step by step we will go through this strategy to make it clear for you. Are you ready? Let’s get started.
Find maximum and minimum
First of all, let’s introduce key definitions, that we will use in this strategy.
A maximum is a candlestick, which is located between two other candlesticks with lower highs. Moreover, it’s important that the next candlestick to the maximum should have lower low.
A minimum is a candlestick, which is located between two other candlesticks with higher lows. Moreover, it’s important that the next candlestick to the minimum should have higher high. Look at the examples below.
Define reversal
A trend is the general direction of the price of an asset on the market. Uptrend (bullish trend) consists of a series of higher highs and higher lows – prices are moving up. Downtrend (bearish trend) is classified as a series of lower lows and lower highs – prices are moving down. The best moment to enter the market is the trend reversal.
There are two ways to define a reversal:
1. If there is an uptrend and you find a minimum, draw a line through its close price. If after the breakout of this line two next consecutive candlesticks close lower than this line, it should be a trend reversal.
2. If there is a downtrend and you find a maximum, draw a line through its close price. If after the breakout of this line two next consecutive candlesticks close higher than this line, it should be a trend reversal.
Enter the market
Ok, now we are able to define the reversal. Let’s try to find the right moment to enter the market. We will use the concept of Elder’s triple screen strategy. According to it, when there is a signal on a bigger timeframe, wait for it on a smaller timeframe and enter. Pay closer attention to all the conditions. Some steps may confuse you, but pictures will make everything clear.
Here’s below the detailed instruction:
1. Find the reversal of the trend on the daily chart as written above.
2. Switch to the 4-hour chart.
3. The 1st case: the uptrend occurs on the daily chart.
- Wait for the breakout of the level of the closest minimum on the 4-hour chart.
- After the breakout wait for a new maximum. If it happens, consider buying.
- Put Buy Stop above the new maximum, Stop Loss – below the next candlestick, that closed lower than this maximum.
- Then shift Stop Loss upward and put it below every new minimum.
4. The 2nd case: the downtrend occurs on the daily chart:
- Wait for the breakout of the level of the closest maximum on the 4-hour chart.
- After the breakout wait for a new minimum. If it happens, consider selling.
- Put Sell Stop below the new minimum, Stop Loss – above the next candlestick, that closed higher than this minimum.
- Then shift Stop Loss downward and put it above every new maximum.
*On the 4-hour chart you don’t need to wait for two consecutive candlesticks after the breakout of maximum or minimum level as we waited on the daily chart. You just need the breakout of this level.
Great! You’ve learned the new effective strategy! It’s really unique because of its simplicity and effectiveness. Stop losses will prevent you from failures. However, be aware that it’s better to avoid using this strategy in times of important economic events such as NFP releases. In addition, you can use not only the whole strategy, but also its parts: defining reversal of a trend, finding minimums and maximums and putting pending orders. Enjoy your trading!
Kseniya Medik
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