Shooting Star Candle Strategy (Backtest)

Candlestick patterns provide plenty of insight into how the price moved in the recent past and how it might move in the near future. Some traders use these patterns to signal trade entry and exit points. While there are many such patterns, only a few may be effective, and one of them is the shooting star candle pattern. What is the shooting star candle strategy?

The shooting star pattern is a bearish reversal pattern that consists of just one candlestick and forms after a price swing high. It is seen after an asset’s market price is pushed up quite significantly but then gets rejected at higher prices, which indicates that the price may be about to decline.

Thus, the shooting star candle strategy is a short-selling strategy that can be used to identify short-selling opportunities in the market, especially in a down-trending market or a range-bound market.

In this post, we take a look at the shooting star candle strategy. Unlike most other websites, we’ll go on to backtest the performance of the shooting star with strict trading rules (at the end of the article).

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What is the shooting star candle strategy?

In candlestick analysis, the shooting star pattern is a bearish reversal pattern that consists of just one candlestick and forms after a price swing high.

Also known as the bearish pin bar among western traders using the bar chart, the formation is seen after an asset’s market price is pushed up quite significantly but then gets rejected at higher prices, which indicates that the price may be about to decline.

Shooting star candle strategy

Thus, the shooting star candle strategy is a short-selling strategy that can be used to identify short-selling opportunities in the market, especially in a down-trending market or a range-bound market. It can be used in any timeframe, as the pattern can form in any timeframe.

The pattern is formed when the price trades higher during a trading session and later declines to close around the opening price of the session. This creates a long upper wick, a small body, and little or no lower wick.

The pattern must appear at the top of an upswing, and the upper wick must take up more than half of the length of the candlestick for it to be considered a shooting star. It must not be confused with the inverted hammer pattern, which is a similar pattern that forms at the bottom of a downswing.

While the shooting star candlestick pattern is often thought to be a possible signal of bearish reversal, the inverted hammer pattern is considered a bullish signal.

Where does the shooting star candlestick come from, and what is its history?

The candlestick chart was believed to have originated from Japanese rice merchants and traders who invented it to track market prices and daily momentum. The origin can be traced to a rice trader in Japan named Homma Munehisa in the 18th century AD.

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Thus, the charting method was in use in Japan for hundreds of years before becoming popularized in the Western world. It was introduced to the Western world by Steve Nison in his book Japanese Candlestick Charting Techniques, first published in 1991.

Steve Nison found that there are certain patterns in the chart that Japanese traders use to identify trading opportunities. One such pattern is the shooting star pattern.

What are the rules of the shooting star candle strategy?

As a price action trader, there are many things to look out for when using the shooting star pattern to identify a trading opportunity. The first thing is how to identify the pattern, and the other is how to trade it.

Rules for identifying the candle pattern

The wicks: The shooting star candlestick has a long upper wick and little or no lower wick. The long upper wick is known as the tail, while the short lower wick is called the nose. The upper wick is usually more than half of the entire range of the candles and about twice or more the size of the body.

The body: The body is the part between the opening price and the closing price. It is usually small — about 1/3rd the range or less — and positioned near the lower end. The body can have a bullish (green) or bearish (red) color. It takes a bearish color if the trading session closed below its opening price, and when the trading session closes above its opening price, the body of the shooting star pattern will have a bullish color.

But whatever the color of the body, the shooting candlestick pattern has a bearish implication — the bearishness of the shooting star results from the long upper tail indicating price rejection at higher levels. Note that when a shooting star pattern has no real body — the candlestick opened and closed at the same level around the lower end — it is called a gravestone doji, and it also has a bearish implication, provided it is occurring at the top of a price swing high.

The situation: For the pattern to be a shooting star, it has to occur at the top of an upswing. This differentiates it from its look-alike, the inverted hammer, which occurs in a price swing low and tends to have a bullish effect. In both patterns, the candlestick opens low, trades higher, and closes low near the open — while the shooting star occurs in an upswing, the inverted hammer occurs in a downswing.

In summary, these are the features that can help you recognize the shooting star pattern:

  • The price closes at the lower ½ or 1/3rd of the candlestick’s range
  • It has a small body or may not have at all
  • It has little or no lower wick (the nose)
  • The upper wick (the tail) is about 2 or more times the size of the real body
  • It occurs at the top of an upswing

Rules for trading the shooting star strategy

The following rules might help you improve the odds of success when trading the shooting star pattern.

  • Look for the pattern in rallies during a downtrend: The shooting star pattern gives a bearish signal, so it is best to look for the signal in a downtrend. It would be dangerous trying to short an uptrend that has not reversed — at best, you would be trading a pullback swing, and at worst, you find yourself on the wrong side of a high-momentum impulse wave. But if you short a rally in a downtrend, you would be on the side of the downward high-momentum impulse wave.
  • Aim to trade the pattern from a resistance level: The pattern works well when it pierced a resistance level and gets rejected. It shows the price is not ready to trade above the resistance level.
  • Short the upper border of range-bound markets: Apart from using the shooting star pattern to trade the individual downward impulse swings in a downtrend, you can trade it in a range-bound market — use it to short the upper border of the range.

How do you read a shooting star candle strategy?

In chart analysis, a candlestick represents the price movement during a single trading session, which can be an hour, 30 minutes, four hours, a day, or whatever, depending on the timeframe of the chart.

During a trading session (as represented by the candlestick), the price momentum shifts back and forth between the bulls and the bears until the price closes. In the case of the shooting star pattern, the bulls had momentum in the initial stages of the session, but the bears forced their hands later on. Here’s how it happened:

In continuation with the already existing upswing, the bulls pushed the price up and may even drive it to a new high. However, the bears stepped in and put up a big fight, forcing the price back down to close around the open price. If the price closes below the open price, the body of the shooting star pattern will have a bearish color, but if it closes above the open price, the body will have a bullish color — either case, the momentum is with the bears when the session closed.

This is why the shooting star is a reversal pattern, as it implies price rejection at higher levels. Since the pattern occurs at the end of swing highs, which are often resistance levels, it signals a potential downward reversal. While the pattern can mark the beginning of a trend reversal, it is preferable to look for it at the end of a pullback in a down-trending market, where it may initiate a new downswing — an impulse wave to the downside.

What is the best indicator for shooting star candle strategy?

There are many good indicators for trading the shooting star candle pattern. These are some of the common ones:

  • Trendlines: You can use trendlines to delineate the trend to know whether you should be trading the strategy or not. But more importantly, in a downtrend, the trendline can be a dynamic resistance level where pullbacks can reverse to start a new impulse wave. A shooting star dropping from a trendline could be a strong signal.
  • Moving averages: As with trend lines, moving averages help you to find the trend and can serve as dynamic resistance levels where a pullback can reverse from. Looking for a shooting star pattern on a pullback to a resistance level is a worthy strategy.
  • Bollinger Bands: The Bollinger Bands is a good indicator for trading the shooting star pattern in a range-bound market. When the pattern occurs around the upper band, it could be an opportunity to go short.
  • Oscillators: In a range-bound market, the overbought signal in an oscillator can be combined with the shooting star pattern to generate a short-selling signal. This can also work in a down-trending market, where the oscillator’s overbought signal could indicate the end of a pullback.
  • Resistance levels: Indicators that track and draw resistance and support levels may be helpful for trading the shooting star pattern. You want to be looking for a signal around a resistance level.

How do you trade shooting star candle strategy?

These are some of the ways to trade the shooting star pattern:

  • Shorting rallies in a downtrend
  • The upper boundary of a ranging market
  • Trading bearish reversal chart patterns

Shorting rallies in a downtrend

In a down-trending market, you can use the shooting star pattern to short rallies in a downtrend. To trade this strategy, you will need to confirm that the price is in a downtrend and then look for possible resistance levels where a rally can reverse. When the price gets to that level, wait for a shooting star pattern to form and then enter a short position.

Here is how to go about this strategy:

  • Confirm the presence of a downtrend with a trendline or moving average
  • Wait for the price to pull back to the trend line, moving average line, a resistance level, or the 50-60 Fibonacci retracement level
  • If a shooting star candlestick pattern forms, go short at the beginning of the next candlestick
  • Place a stop loss about 1 ATR above the swing high
  • Put a profit target at the next support level or a 100% Fibonacci expansion level — you can also ride the trend with a trailing stop

See Crude oil WTI chart below:

How do you trade the shooting star candle strategy?
The above chart is that of WTI Crude Oil. The price pulled back to a resistance level and got rejected above it, forming a shooting star pattern. You can see that the level roughly corresponds to the 50% Fibonacci level.

Shorting the upper boundary of a ranging market

Another way to trade with the shooting star pattern is to short the upper border of a ranging market. You can draw horizontal lines to identify the borders of the range or you can use the Bollinger Bands, which can give a rough estimate of the boundaries of the range.

You look to go short around the upper boundary, which is the resistance zone, but you don’t just go short when the price hits that level or band; you want to see signs that the price is rejected at that level to show that a bearish reversal might be on the cards.

This is what the shooting star pattern does for you. If you see the shooting star pattern at that level or band, you can go short when the next candlestick opens. You place your stop loss above the highest level and put your profit target above the lower boundary. See the USDCHF chart below:

Shooting star candle strategy example
In the above chart, you can see a market in a range. A shooting star pattern occurred at the upper boundary, creating a good shorting opportunity.

Trading bearish reversal chart patterns

You can use the shooting star pattern to trade some bearish reversal chart patterns, such as the head and shoulders pattern, the double top pattern, and the triple top pattern. The shooting pattern can give you an early entry so you don’t have to wait for the classical method of entry for such chart patterns, which is usually on the breakout below the neckline — the support line connecting the corresponding swing lows in each pattern.

For example, with the shooting star candlestick pattern, you can enter a trade at the swing high preceding the breakout of the neckline. In a head and shoulder pattern, this would be the right shoulder, especially if the price had already made a lower swing low before the right shoulder’s lower swing high (creating a Quasimodo chart pattern which you trade as such). Likewise, a shooting star pattern at the second peak in a double top chart pattern or the third peak in a triple top pattern might be an indication to go short because those peak levels are already established resistance levels.

Whichever pattern you trade, your stop loss (if you want a good reward/risk ratio) is above the highest point in the resistance zone. Meanwhile, you can have two profit targets:

  • The first target would be just above the neckline so that you get something in case the price doesn’t break the neckline and decline further.
  • The second profit target should be at the classical target for chart patterns — the height of the chart pattern measured at the other side of the neckline.

See the chart of Bruker Corporation’s stock (BRKR) chart below showing a triple top chart pattern.

Shooting star candle strategy reversal
Notice the shooting star pattern that formed at the third peak, creating an early trading opportunity. You can see the first and second profit targets.

Pros and cons of the shooting star strategy

The shooting star strategy has many advantages and disadvantages. Some of the advantages include:

  • Being a single-candlestick pattern, it is easy to spot and trade
  • You know the right place to look for the pattern
  • You can get a good reward/risk ratio when you set your stop loss above the pattern and the take profit around the next support level

Some of the demerits of the strategy include:

  • It is a price action strategy, which is generally difficult to code into a trading algorithm
  • You may have to trade it manually
  • As with any other strategy, it can have many losing trades.
  • It’s a pattern that happens relatively infrequent

Before you use the strategy, make sure you backtest it to know if it can make money. It makes no sense to put your hard-earned money on a strategy that does not have positive expectancy.

Shooting Star example

Here is another example of the shooting star strategy currently at play in the S&P 500 Index e-mini futures (see the chart below).

The market has been in a downtrend since the beginning of 2022. On Friday, October 28, and Monday, October 31, the market tested a local resistance level (blue line) after a two-week rally. By Tuesday, November 1, it formed a shooting star pattern. A trader who went short at the open of the next candle would be in profit as the market declined heavily on Wednesday and Thursday before profit-taking came in on Friday.

Shooting star candle strategy trading rules
A smart trader may already book some profits.

However, we recommend that you backtest all your trading ideas (how to find and generate trading ideas).

In the section below we backtest the Shooting Star strategy:

Shooting star candle strategy backtest

You need the historical performance of any strategy if you are to trade it live with your hard-earned money. If you have no idea if a particular strategy has an expected positive expectancy, why would you trade it? There is no problem finding anecdotal evidence of a successful pattern, and the internet is flooded with it. But why would you risk money if you are not sure it has performed well in the past? If it has not performed well in the past, you can be sure it won’t work in the future, either. That’s why we spend a lot of time backtesting to make data-driven decisions.

Any backtest requires strict trading rules, settings, and performance metrics. This requires effort and thus many skip it in the dream of making quick and easy money.

We can save you a lot of time and effort: we have already done the work for you (the Shooting Strat candle strategy is already backtested by us). As mentioned in the introduction of the article, we have put all 75 candlestick patterns into quantifiable trading rules that can be backtested and put to the test – including the Shooting Star strategy.

As a matter of fact, candlestick patterns work pretty well on stocks. We compiled the ten best candlestick patterns that had more than 50 trades in the S&P 500 (SPY) and backtested such a strategy since SPY’s inception in 1993. The equity curve looks like this:

Shooting Star strategy backtest

There are 705 trades and you spend only 35% of the time invested. Despite the low exposure, you have a return that is higher than the buy and hold: 10.6% vs 7.9%. If we divide the return by the time spent in the market, we can argue this is the risk-adjusted return: 30.4%. The profit factor (profit factor example) is a good 2.5 and the Sharpe Ratio (what is a good Sharpe Ratio?) is at an impressive 1.35.

If you want to gain access to the research and the performance of each candlestick pattern, you can buy the research for a small fee:

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