Introduction:
Candlestick patterns are a popular tool stock market traders use to predict short-term price movements and make informed trading decisions. They comprise one or more candles with distinctive wicks, bodies, and shadows. Understanding various candlestick patterns allows you to identify potential trend reversals or continuations and determine entry and exit points for your trades.
In this article, you will learn about two significant candlestick patterns – shooting star and inverted hammer. Both these patterns indicate trend reversals, albeit in different circumstances. Here’s more on their meaning, significance, and differences.
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What is a shooting star candlestick pattern?
The shooting star is a bearish reversal pattern that typically occurs at the end of an uptrend. It is characterized by a single candlestick with a small body, negligible lower shadow, and a long upper shadow at least two times the length of the body. The long upper shadow indicates that the buyers have pushed the stock price significantly higher during the given trading session. However, by the closing point, the sellers have regained control, leading to a drop in the price.
Key characteristics of the shooting star pattern
Below are the key characteristics for identifying the shooting star pattern:
- Small body, indicating that the opening and closing prices are close to each other
- Long upper shadow, indicating a failed attempt by buyers to sustain bullish momentum
- Very short or negligible lower shadow
Interpretation of a shooting star pattern
The appearance of a shooting star pattern suggests that the bullish momentum is weakening, and a potential reversal to the downside might be imminent. Hence, it can be an opportune moment to enter a new short position or exit the long position. However, you must also look for confirmation signals before making trading decisions, such as a bearish follow-through in the next candle or a shift in other technical indicators.
What is an inverted hammer candlestick pattern?
On the other hand, an inverted hammer is a bullish reversal pattern that typically occurs at the end of a downtrend. Like the shooting star pattern, it has a small real body, negligible upper shadow, and a long lower shadow that is at least two times the length of the body. The long lower shadow indicates that the sellers pushed the stock price significantly lower during the trading session. However, by the closing point, the buyers have regained control, leading to a rise in price.
Key characteristics of an inverted hammer
Below are the key characteristics for recognizing the inverted hammer pattern:
- Small body, indicating that the opening and closing prices are close to each other
- Long lower shadow, indicating a failed attempt by sellers to sustain bearish momentum
- Very short or negligible upper shadow
Interpretation of the inverted hammer pattern
The appearance of the inverted hammer pattern suggests that bearish momentum is weakening, and there’s a potential for a trend reversal to the upside. Hence, it can be an opportune moment to enter a new long position or exit a short position. However, as with the shooting star pattern, you must confirm your trading decisions with other technical indicators and candlestick patterns.
Major differences between shooting star and inverted hammer
By now, you must be clear about the shooting star and inverted hammer patterns. While both these patterns involve small real bodies and long shadows, the distinction lies in the body's position and the shadows. While in a shooting star pattern, the small body is at the bottom of the price chart with a long upper shadow, in an inverted hammer pattern, the small body is at the top with a long lower shadow.
Besides, the shooting star is a bearish reversal pattern occurring at the end of an uptrend, signaling an opportune moment to enter a new short position. In contrast, the inverted hammer pattern is a bullish reversal pattern occurring at the end of a downtrend, signaling an opportune moment to enter a new long position.
To conclude
Understanding candlestick patterns like shooting stars and inverted hammers is crucial to making informed trading decisions in the stock markets. However, the two patterns look quite similar. And hence, you must also recognise the differences between them to avoid wrong interpretations and incurring huge losses. Additionally, you must always confirm your trading decisions with other candlestick patterns and technical indicators.
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