Stock trading involves the reading of complex technical charts and maps. These charts accurately identify the changing patterns, momentum and trends in stock prices. One of the most common technical tools used to track the movement of securities is the candlestick pattern, which consists of rectangular shapes and lines, resembling a candle with wicks on either side. Investors rely on these patterns to make buying and selling decisions. This article highlights the difference between two such candlesticks – shooting star vs inverted hammer. Read on to understand the differences between them.
The inverted hammer candlestick – also known as the bullish pattern
To understand what is the difference between an inverted hammer and shooting star; you first need to be aware of what an inverted hammer candlestick is.
The inverted hammer candlestick pattern is primarily a bottom reversal pattern. This pattern is typically formed when a downtrend is drawing towards an end. It can also develop during a pullback in an uptrend or at support. For an inverted handle candle to be formed, the price of the stock should trade at a significantly higher level than where it opened. It should then drop close to or near the day’s low. In the inverted candlestick pattern, the upper shadow demonstrates some indication that potential buyers may have started to step up.
Though the sellers (referred to as bears) may have managed to regain control, by driving the price lower, traders can notice the appearance of buying interest, which signifies the early signs of bears. As such, the next trading session must confirm the occurrence of a sharp bullish reversal and consequently, a bullish day. The inverted hammer thus represents the fact that a trend is facing pressure and the candle formation suggests that the bulls are set to enter the system anytime soon.
The shooting star candlestick – also known as the bearish pattern
Unlike the inverted hammer, which is a bottom reversal pattern, the shooting star is essentially a top reversal pattern. As such, the primary difference between an inverted hammer and shooting star is that the former is a bullish reversal pattern while the latter is a bearish reversal pattern. The shooting star pattern typically occurs at the end of an uptrend, or during a bounce within a downtrend, or at the resistance point.
To form the shooting star candlestick pattern during an ongoing, strong rally, the price of the stock opens significantly higher and continues to rise sharply. However, as the session reaches its end, the price reverses, closing near the day’s low. The next trading day should confirm this pattern with a strong bearish day. So, to sum it up, the trend is up, but the shooting star candlestick formation suggests an early sign indicating that bears have now started fighting. Also, the follow-up selling that occurs essentially confirms the end of the uptrend and a price reversal, at least in the short-term.
Inverted hammer vs shooting star – Three points of inferences
When it comes to inverted hammer vs shooting star, three simple conclusions may be drawn
1. The inverted hammer pattern may be considered as an entry point
2. The shooting star pattern may be considered as an exit point.
3. To ensure that you have an effective trading strategy, you can benefit from mixing and matching the various patterns
As is evident, the differences between an inverted hammer and shooting star are as simple as they are straightforward. Adequate knowledge about the different candlestick patterns can assist you in making informed trading decisions. To know more about the different candlestick patterns, visit the Angel One website.