The shooting star and inverted hammer candlestick patterns are bullish and bearish versions of each other respectively.
Shooting Star and Inverted Hammer Candlestick Patterns
Inverted hammerThe inverted hammer candlestick pattern usually occurs at the bottom of a downward trend. It signals a potential reversal of the downward trend. However, it is not a signal to buy calls; it is just a warning that there could be a change in the price movement of the underlying asset.
This pattern forms when the open, close and low are generally at the same price level. The formation is characterized by an extended upper shadow, which is two times longer than the real body. A bullish inverted hammer is formed when the low and the open price are similar. This type of bullish formation is stronger than the bearish hanging man, which occurs when the low and close are similar.
The bullish formation of the inverted hammer occurs as a result of a prolonged downward trend in the market. In spite of the downward trend, traders still went ahead to sell the underlying assets and as such propelled the prices to the opening price. Even then, bulls were much stronger than the bears. Traders usually use the formation of the inverted hammer pattern to predict whether the price of the underlying asset will spike or decline.
Note that the inverted hammer candlestick does not signal an opportunity to buy. It is important to use other indicators (ex. trading volumes) alongside this formation to identify a buy signal.
Shooting star patternThe Shooting Star candlestick formation is the bearish version of the inverted hammer candlestick. The formation occurs at the top of an uptrend when the open, close and low are generally the same. The shooting star formation is characterized by a shadow with a longer upper body that is two times the length of the actual candlestick body.
A strong shooting star candlestick is formed when the low and close are similar. The formation means that the bears were stronger than the bulls, in effect pushing the prices up to the closing price. The pattern is essentially less bearish (but still bearish) when the opening and the low prices are generally the same. In such a case, the bears were stronger than the bulls but they were not strong enough to push the prices back to the opening prices.
Following an uptrend, the Shooting Star formation could be a signal of a declining uptrend thereby requiring that traders exit long positions. To identify a sell opportunity, it is best to use the Shooting Star pattern with other indicators.
When trading the shooting star what’s important to consider is an opportunity to enter a short. Given that the prices encountered resistance at the top of the uptrend, the stop loss can be established at 10-20 pips above the uptrend of the shooting star pattern.
It is possible to enter a short position through various channels. For starters, you could enter at the start of the next candle or alternatively apply a more conservative approach by retesting the wicks especially when the candlewick is longer than usual. By retesting the wick, you would be entering a short position at a higher price using a tighter stop, thereby reducing your risk exposure.
Here you can find a beautiful video which explains Shooting Star and Inverter Hammer
[youtube align='none' width='540']https://www.youtube.com/watch?v=sS8a6U94HIw&noredirect=1[/youtube]