In today’s lesson, we will see what the shooting star candle is with a shooting star trading strategy for the forex market. Candlestick trading is prevalent among traders, and many professional traders use it.
Furthermore, in the price chart, shooting star candle forms with a logic that makes traders rely on the trading system.
What is the Shooting Star Candle?
The shooting star or the exhausted shadow candle is a reversal candlestick pattern that appears after a bullish movement in a currency pair.
It is a similar candlestick of the forex hammer, pin bar candle, hanging man, and inverted hammer. The unique characteristic of this candlestick is that it has a long wick and a small body like the pinbar candlestick. Moreover, it is almost similar to the inverted hammer candle pattern.
The shooting star candle forms after a bullish trend and indicates a bearish pressure. This candlestick forms with an open, low, and closes at almost the same price. Furthermore, there is a long upper shadow, which is nearly 2 times higher than the candle body.
When the closing price and the low price of a shooting star candle are nearly identical, it will provide a better accuracy trade. Furthermore, it indicates that sellers have successfully eliminated buyers and close the price below the opening price.
On the other hand, a shooting star with the closing price above the opening price is less reliable as bears failed to close the price below the opening price. However, as the price is rejected with the ling wick, the price can continue lower.
In the image below, we can see how the shooting star pattern looks like:
Let’ have a look at the shooting star bearish trading strategy.
Shooting Star Candle Trading Strategy
The shooting star candlestick pattern is a bullish reversal pattern. Therefore, it appears in the bull market and indicates that buyers are going out of the market, and sellers are taking control.
If you want to make a trade using the shooting star chart pattern, you should identify the bullish trend. We know that in a bullish market, prices move highs by creating new higher highs. However, it is not likely that the price will continue moving higher for a lifetime.
If you want to take a sell trade using the shooting star candle, it is crucial to find the price’s location.
Location of the Shooting Star Candle
If the price continues to move high and you took sell trades from the bullish trend, your trade might hit stop loss. In the image below, we can see a failure of shooting star candles in a bull market.
What is the perfect location for Shooting Star?
To find the perfect shooting star chart, you have to do a top-bottom analysis of the market. You should move to the higher timeframes (like daily and weekly) and identify the key resistance areas.
Any rejection with shooting star candle from a key resistance area is most reliable.
On the other hand, a bullish market price creates a new higher high, but after some time, price loses momentum and barely creates new highs, which indicates that buyers are losing momentum and sellers are coming.
In this situation, a bearish hammer candlestick from an event level or a significant resistance level would create a potential selling opportunity.
In the image above, we can see how the price failed to create new highs and moved down as soon as buyers reject the shooting star candle.
There are two types of entry from a shooting star candle, depending on risk management.
For aggressive trading, you can enter the trade as soon as the market breaks below the candle’s low. You can enter the trade manually or put a sell stop at that level.
On the other hand, if you are a conservative trader, you can wait for the price to correct 50% of the shooting star bar and enter the trade as soon as it rejects the 50% level in a lower timeframe.
Make sure to enter the trade after the candle closes.
The bearish shooting star candle from any significant resistance level has a higher possibility of market reversal. However, any candle close above the candle high indicates the invalidation of the sell setup.
Therefore, in this candle trading, the Stop Loss should be above the wick of the shooting star with some buffer.
As the price is not the same at every broker and it fluctuates with the increase in spread, you should put the stop loss 10 to 15 pips above the candle high to avoid unexpected stop out.
The take profit depends on the market momentum and the speed of the movement. If the price moves down aggressively from the entry point and creates a new lower low, the price is likely to move lower by breaking near term lows.
However, the primary intention would be to close 50% of the trade at the near term event level and wait for the price to reach the next significant support level.
In every case, you should close the trade 10-15 pips before hitting the take profit level to avoid unexpected market rebound.
Trade management is an essential part of every trading strategy. In the shooting star candlestick pattern, you should follow the below-mentioned trade management rules:
- Do not take more than 2% risk per trade.
- Do not expect that your every trade will hit take profit.
- Only take those trades that have a minimum 1:2 risk: reward ratio.
- Make sure to enter the trade after the forex candle
- After entering the trade, move your stop loss at breakeven as soon as the price creates a new low.
Let’s have a look as the summary of shooting star trading strategy:
- Identify the shooting star patterns at a potential resistance area.
- Enter the trade after closing the candle.
- Make the trade risk-free as soon as it creates a new lower low.
- Close the trade at the near term support level and extend the take profit if the market pressure remains favorable.
Despite having a good shooting star candle formation, traders should understand the risk associated with the market. No trading strategy in the world can guarantee you a 100% profit.
Therefore, besides taking an entry, it is essential to calculate risk and manage the trade.