• HDFC securities
• 27 Jan 2023
• Knowledge Centre

Analyzing candlestick patterns is a crucial part of technical analysis. A trader can get important details about the price and how it reacts at different levels. Candlestick patterns are reoccurring patterns which can help traders and investors identify the continuation or reversal of trends. There are different candlestick patterns but, in this article, we will look at one of the most significant candlestick patterns known as the shooting star candlestick pattern.

What is the Shooting Star Candlestick?

Before we understand the meaning of a shooting star candlestick, we should know what candlesticks are. A candlestick is a method of tracking the price of a given security over a period of time. Originally used by Japanese rice merchants, candlesticks have become a staple in the financial world.

The candlestick depicts the open, close, low and high prices of a security over a period of time. A candlestick has a body and a wick or shadow. The colour of the body indicates if the price of the security has closed higher or lower than the opening. The size of the candle, the wick and the colour of the candle are important aspects to consider while studying candlesticks.

A shooting star candlestick is a bearish candlestick which shows high selling pressure. This candle has a small body and a long wick or upper shadow. This indicates that the price opened and advanced but closed near the opening price.

The shooting star candlestick usually occurs after an up-move in the market and could signify that the trend may reverse. The shooting star candlestick pattern is typically preceded by bullish candles that are making higher highs.

How to interpret the Shooting Star Candlestick?

The shooting star candlestick is a relatively easy candlestick pattern to understand. The pattern indicates that the trend is reversing after an uptrend. The shooting star candlestick advances rapidly with high buying pressure at open but closes near the opening price. This indicates that there is immense selling pressure at higher levels. A smaller body indicates that there are few buyers at higher levels and that sellers have more power.

How to trade the Shooting Star Candlestick Pattern?

Before trading the shooting star candle pattern, there are certain things to keep in mind:

• Confirm the prevailing trend. The shooting star candlestick pattern can be confirmed if the market has been in an uptrend.
• The shooting star candlestick should have a long wick or shadow and a small body. There is little to no lower shadow.
• Check for nearby resistance and support levels to identify important price levels.
• Once a shooting star candlestick has formed, a trader can enter after the low of the shooting star candlestick has been broken.
• A trader should aim for a target equivalent to the size of the shooting star candle.
• Traders should also keep a strict stop-loss.

Although candlestick analysis can be helpful, it should not be considered alone to enter a trade. Using indicators along with these patterns can increase the odds of a winning trade.