Trading the shooting star formation is similar to trading a hammer. The focus is on the candle itself of course, especially its wick that extends higher. In the example below, we see a AUD/USD chart that moves in an uptrend.
In the middle of the chart, the price action corrects lower just to get back higher again and quickly. What follows is the fresh high in the context of a long bullish candle. If you look at this candle only, the situation looks very positive for the bulls, as there is an uptrend in action and the new high has just been posted.
However, the situation quickly changes. The price action moves higher again in the session, fails to create a new high, and reverses to close at the low of the session. As a result, a shooting star candle is formed.
The next candle is a long bearish candle that confirms that a reversal is taking place. Ultimately, the price action retreats 250 pips lower.
Whenever you decide to trade the reversal that was initiated by a shooting star, the stop loss should always be placed above the candle’s high. This is arguably the greatest strength of this pattern, and as it is with a hammer, it gives you a clear level to play against.
Any sustainable move, with a high close, above the candle’s high, invalidates the pattern. Take-profit order is dependent on your trading style and risk management. Our advice is to consult other indicators, like Fibonacci, trend lines, or moving averages, and decide whether to exit a positive trade or not.
To demonstrate this, let us move your attention to a chart below. We have a NZD/USD trading sideways for the most part. In the middle part of the chart, the price action starts to move gradually higher.
At one point, there is a new high in place, above the horizontal resistance. However, the buyers lose control over the price action, which initiates the pullback. A failure at important resistance/support levels is not a normal failure, it is usually much more important. For this reason, the price action rotates back lower following a failure to clear the resistance and returns to support.
The upper red line shows our stop-loss, which is around 20 pips above the session’s high. Any move to these levels where our stopp-loss is means that the pair is in a breakout territory and there is no reversal.
Our profit-taking order (the lower horizontal black line) is a simple trend line that shows where the pair bottomed during the previous attempt to move lower. Hence, we are looking for a pullback to the old support.
In this situation, we are risking 20 pips to earn nearly 90 pips. A simple calculation shows that it is a 1:4.5 risk ratio, an extremely profitable trade. Opportunities as profitable as this one are quite rare in the markets, but this does demonstrate how powerful a shooting star candlestick pattern can be.
Before you start risking your own capital, you may want to consider opening a demo trading account
. This way, you will practice with virtual funds and equip yourself with an array of trading patterns and formations to apply when you start trading live.