What it means
A candlestick shows the open, high, low and close for one period. The body is the range between open and close, and the shadows are the thin lines above and below.
In a shooting star the price rises well above the open, then falls back to close near the open. Investopedia lists the traits: it appears after a strong uptrend, at or near a recent high, with an upper shadow at least twice as long as the body, and a missing or very short lower shadow, with a close below the open read as stronger.
The story is simple: buyers took control early and drove the price up, then sellers absorbed the buying and pushed the price back, which suggests buying power may be fading. One candle is only a hint.
Investopedia stresses that the pattern does not guarantee a reversal, and that traders look for confirmation. A confirmation can be a strong bearish candle the next period, a close below the shooting star's low, a turn in an indicator such as RSI or stochastics, or heavy volume.
The pattern looks like the inverted hammer, but the context differs. An inverted hammer appears after a downtrend and may hint at a bottom, while a shooting star appears after an uptrend.
The shape alone does not tell them apart, so the trend before it matters. The evidence is mixed.
A 2006 study in the Journal of Banking & Finance tested candlestick strategies on Dow Jones Industrial Average stocks and found they did not have value, which it took as further evidence that this market is informationally efficient. Results can differ for other markets and time frames, so traders test any rule on their own data.
A trader who uses it usually pairs it with a stop-loss order above the high and a clear target. Position size should come from the risk per trade, not from confidence in the signal.
Costs, gaps and slippage also reduce results, and short selling carries its own risks.
In practice
Real-world examples.
Example
A fictional stock opens at $100, trades up to $106, falls back and closes at $99, with a low of $98.80. The body is $1 (100 - 99), the upper shadow is $6 (106 - 100) and the lower shadow is $0.20. The upper shadow is six times the body, so the pattern qualifies.
Example
A fictional trader waits for a close below the low and shorts at $98.50, with a stop at $106.50 above the high. The risk is $8 per share. A target of $82.50 gives a reward of $16, a reward-to-risk ratio of 2.
Example
A fictional account holds $20,000 and risks 2% of it, or $400, on the trade. With $8 of risk per share the size is 50 shares (400 / 8). If the stop is hit the loss is $400, and if the target is hit the gain is $800 before costs.
Formula
Calculation
Upper shadow = High - Max(Open, Close). With a high of $106 and an open of $100, 106 - 100 = $6.
Body = Absolute value of (Open - Close). With 100 - 99 = $1.
Position size = Risk budget / Risk per share. With $400 / $8 = 50 shares.
Reward-to-risk ratio = Reward per share / Risk per share. With $16 / $8 = 2, so a winning trade is expected to earn twice what a losing trade costs.Case study
Seen in the real world.
This case study is fictional and illustrative. Diego, 36, in Buenos Aires, watches a stock that has risen 15% in three months. A weekly candle forms with a long upper shadow and a close near the open. He does not trade right away. He waits for the next week and sees whether the price closes below the shooting star's low.
The next week it does, and the RSI turns down from overbought. He shorts a small position with a stop above the high and risks 1% of his account. Two months later he has a modest gain. He notes that he had similar patterns before that failed, so he keeps a log of each trade to see if the rule works for him. After 20 logged trades he finds that the pattern worked on only some of them, and that results improved when he waited for confirmation and avoided candles that formed without a clear prior uptrend.
Watch out
Common mistakes.
- Trading a single candle as a sure signal without waiting for confirmation.
- Calling a candle a shooting star when it did not follow an uptrend.
- Placing the stop-loss without sizing the position to a fixed risk.
Questions
People also ask.
What is a shooting star in trading?
It is a candlestick with a small body at the bottom and a long upper shadow, seen after an uptrend as a possible reversal signal.
Is a shooting star bullish or bearish?
It is read as bearish. It suggests buyers lost control to sellers, but it needs confirmation.
How reliable is the pattern?
Not very by itself. Studies have found limited value for candlestick rules, so traders confirm and test them.
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