What is a Shooting Star
A shooting star is a bearish candle with a long upper shadow, little or no lower shadow and a small real body near the day's low. It comes after an uptrend. Said differently, a shooting star is a type of candlestick formation that results when a security's price, at some point during the day, advances well above the opening price but closes lower than the opening price.
For a candlestick to be considered a shooting star, the formation must be on an upward or bullish trend, and the distance between the highest price for the day and the opening price must be more than twice as large as the shooting star's body. The distance between the lowest price for the day and the closing price must be very small or nonexistent.
BREAKING DOWN Shooting Star
Shooting stars indicate potential price tops and reversals. The shooting star candle is most effective when it forms after a series of at least three or more consecutive rising candles with higher highs. As the price rises, buyers get impatient waiting for a pull back, and leap frog over one another to purchase shares. Eventually, the buying frenzy hits a peak as the last of the immediate buyers jump into the stock (or any financial instrument) in a greed-driven panic to mark the highest high of the preceding series of candles.
Psychology of Shooting Stars
The earlier buyers eventually begin to take profits, and short-sellers enter into the stock, causing an immediate price drop after hitting a new high. The candle closes with a wick or shadow that is at least twice the size of the body. The wick or shadow represents the buyers who are immediately under water as liquidity starts to dry up. This is the potential shooting star candle. The very next candle will confirm whether it is a shooting star or a continuation candle.
Shooting Star Confirmation
The candle that forms after the shooting star is what confirms the shooting star candle. The next candle must fail to make a higher high and then proceed to close under the close of the prior candle. This represents the trapped buyers who quickly realize they may have overpaid for the position as the price stops rising. When the second candle closes lower than the prior candle low, it indicates that every buyer on the shooting star candle is now underwater. The tension builds until the proverbial trap door opens. Greed turns into fear as liquidity vaporizes, which in turn causes more panic selling. This can form a new series of falling candles with lower lows, representing a price pullback that could turn into a trend reversal.