What Are Market Cycles And How Do Traders Use Them?
Financial markets alternate between periods of decline and growth. They are related not only to the economy, but also to the psychology of investors.
Shooting star trading strategy
2021-07-12 • Updated
Information is not investment advice
A shooting star pattern is really popular among traders because of its simplicity and effectiveness. Elsewhere, this pattern has a significant advantage – it occurs on the charts quite often, so it won’t take too much time to find it. 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!
What is a shooting star?
- A shooting star is a candlestick with a long upper shadow and a little lower shadow.
- As a rule, it has a small body, which should be close to the low of the session.
- A shooting star only appears after an upward price movement. It is important! The pattern occurs after a swing higher in price action and not after a swing lower.
- The color doesn’t matter!
Look at the picture below – it is the shooting star!
What does a shooting star signal?
A candlestick roughly represents the tug-of-war between buyers and sellers. If a candlestick grows up, it means that there are more buyers or bulls on the market. Therefore, the price rises. On the flip side, if a candlestick goes down, there are more sellers or bears on the market. As a result, the price moves downward.
The long upper tail of a shooting star shows that bulls (buyers) were trying to push the price higher, but by the end of the session more bears (sellers) appeared, and they pulled the price lower. In other words, higher prices were rejected, so the price moved down. That’s why the price is likely to go down in the next session as well.
How to trade a shooting star?
Great! You’ve learned what a shooting star is and how to identify it. Now the time to know how to use it! There is a simple trading strategy. First of all, you open the chart and try to find a shooting star. Once you’ve noticed the formation of the shooting star, you should wait for the next candlestick to move below the low of the shooting star you’ve just found. You need to do that to make sure the candlestick pattern confirms itself. The perfect market entry will be exactly at the time when this confirmation happens. You can use a sell stop entry to do this automatically.
Example
Let’s try this strategy on the EUR/USD chart.
- After the price moves higher it forms a shooting star.
- The next candlestick goes below the low of the shooting star, confirming the pattern.
- This low is the perfect entry to the market!
- It’s better to put stop loss just above the long upper shadow of the shooting star to minimize possible risks.
- After that, the price moves down, as expected.
- The profit target should be at the support level (for example, the recent lows).
Awesome! You’ve just leveled up your trading skills! Try it in Demo Account.
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