While the shooting star and inverted hammer appear similar on the surface, there are some small nuances that differentiate them. This shooting star vs inverted hammer comparison divulges what these nuances are, so that you can trade these candlestick patterns with confidence.
Shooting Star Candlestick Pattern
The shooting star candlestick pattern is a single candle that appears after an uptrend and signals a potential bearish reversal in prices. This makes it a good place to sell existing long positions, or enter into a new short position.
However, as with anything in technical analysis, this is not a given. You need to incorporate other technical indicators to confirm whether a price reversal is in fact likely. I will show you how to do this later.
Visually, a shooting star candle has a long upper shadow and a small lower body. It may also have small wick below the body, or none at all. This means that the opening price and closing price are similar to one another and appear towards the lows of the candlestick.
In addition, it doesn’t matter whether the body is bullish/green (close>open) or bearish/red (open>close). Both are still considered a shooting star, although a red body is seen as a better bearish reversal indicator, as it shows that sellers outweighed buyers during the session.
The important thing is that the upper shadow is at least 2 times the length of the body.
Inverted Hammer Candlestick Pattern
In comparison, an inverted hammer occurs after a downtrend and signals a potential bullish reversal in prices. This makes it a good place to cover existing short positions, or enter new long positions.
It has a long upper shadow and small lower body, giving it the resemblance of an upside-down hammer. Hence the name, inverted hammer!
Again, it doesn’t matter whether the candle has a bullish/green body (close>open) or a bearish/red body (open>close). Having said that, a green body is generally seen as a more bullish sign, as buyers were able to push prices above the open of the day. This increases the chance of a bullish reversal.
As with the shooting star, the upper wick should be at least 2 times the length of the body.
Shooting Star vs Inverted Hammer
Ok, let’s clear up the key similarities and differences between the shooting star and inverted hammer. These are not to be confused with the hanging man vs hammer candles.
Similarities
As you may have noticed, the shooting star and inverted hammer have identical structures. That is, they both have long upper wicks with small lower bodies.
This means that buyers were largely in control during the session – resembling the upper shadow.
However, sellers eventually took control and drove prices back down towards (and in many cases below) the open of the day, before closing near the lows of the candle.
Differences
The main difference between a shooting star and inverted hammer candle is the direction of the prevailing trend. In particular, a shooting star occurs in an uptrend, whereas an inverted hammer occurs in a downtrend.
As such, the shooting star is a bearish reversal pattern while the inverted hammer is a bullish reversal pattern.
Inverted Hammer vs Shooting Star Summary
| Properties | Shooting Star | Inverted Hammer |
|---|---|---|
| Bullish/Bearish | Bearish | Bullish |
| Location | Uptrend | Downtrend |
| Body | Small Lower Body | Small Lower Body |
| Shadow | Long Upper Shadow | Long Upper Shadow |
How to Trade the Shooting Star Pattern
It’s all well and good being able to spot shooting star candlestick patterns. But how do we actually trade them?
As mentioned earlier, you should never trade any candlestick pattern in isolation. Put another way, just because you see a shooting star candlestick formation on a chart, it doesn’t mean you blindly enter a short position.
This will only lead to “false signals” and misery.
To increase your success rate, you need to take a more nuanced approach using other technical analysis tools. Trading is a probabilities game at the end of the day, so it helps if you can align as many stars as possible in the same direction. Ultimately, the more confirmation you get, the more you stack the odds in your favour.
Since the shooting star is a bearish reversal pattern, you ideally want to see evidence of additional bearish momentum. Therefore, you should ask whether:
- It occurs at a resistance level like a trendline or moving average
- There are other bearish indicators at play like an overbought RSI or MACD crossdown
Seeing multiple of these conditions at the same time as a shooting star increases the likelihood of a bearish reversal.
Let me show you what I mean with an example below…
Entry
Using the automated candlestick recognition feature in TradingView, you can plot over 40 candlestick patterns on any chart you like.
For example, in the chart below you can see a shooting star pattern appear following an uptrend. Our first pre-requisite. We need a trend to reverse, after all!
Next, we should ask ourselves whether it occurs at a resistance level. Since resistance levels act as a ceiling for prices (at least temporarily), they tend to present good short-term selling opportunities. Unfortunately, the share price was at all-time highs in this particular case, so there were no resistance levels to reference.
This is not the end of the world though, as there were some other clues that helped paint a bearish picture for us.
Firstly, you can see that the RSI is in overbought territory (above 70), suggesting that the rally is getting long in the tooth. Moreover, the MACD generated a sell signal shortly after the shooting star appeared.
As such, you could have taken a short position at one of the next few candles, setting a stop-loss just above the highs of the shooting star. You could have even waited until the fourth candle for confirmation from the MACD before entering a short position.
Exit
In terms of devising an exit strategy following a shooting star, there is no exact science unfortunately. We have to use our discretion based on some rough guidelines.
If you have taken a short position as suggested above, then you are looking for sensible places to cover/buy back the shares you sold.
This generally occurs at an area of support on the chart, which could be as simple as a moving average or a range of prices where demand has been strong previously.
I have highlighted some of these potential areas in green below. The green rectangle represents a support zone, while the green circle shows where prices “kissed” the 100-day moving average. Covering at any point around those levels would have marked a profitable exit from your initial short position.
How to Trade the Inverted Hammer Pattern
Now let’s take a look at how to trade the inverted hammer pattern. To make matters simple, it is basically a mirror image of the shooting star.
First thing’s first. You ideally want to see it appear after a downtrend. Since it’s a bullish reversal pattern, it needs a downtrend to reverse in the first place.
Then, you need to confirm the bullish reversal with other technical indicators. To do so, you should ask yourself whether:
- It occurs at a support level like a trendline or moving average
- There are other bullish indicators in place like a MACD cross up or oversold RSI
The chart below shows what this looks like in practice.
Entry
As you can see, TradingView’s automated candlestick recognizer identified 2 inverted hammers over the selected time frame. However, I want us to focus on the second one in the green circle.
Firstly, by zooming out and looking left on the chart, you can see that this inverted hammer coincides with a support level.
These tend to be good places for bullish reversals to take place.
Not only that, but the inverted hammer also coincides with an oversold RSI (below 30) and a MACD crossup.
With all of these in place, the probability of a bullish reversal is high. Indeed, it turned out to be a great entry point, as it marked the exact bottom of the previous downtrend.
Therefore, it would have made sense to enter a long position at the next candle.
However, nothing is 100% certain. To mitigate the risk of losses, you should also set a stop-loss just below the lows of the inverted hammer in case it turns out to be a false signal.
Exit
Before you enter a position, you need to define an exit strategy.
Again, there are no hard-and-fast rules for where you should sell following an inverted hammer. This is generally a matter of opinion based on your trading style. However, in general, you should look to sell at clearly defined resistance levels. This involves looking left on the chart and finding areas that prices have struggled to break above previously.
I have shown 3 potential exit points (red circles) in the chart below to show you what this looks like.
The first 2 circles occur at the same resistance level and would generally suit a short-term swing trader. The third circle occurs at a higher resistance level and would generally suit a more medium-term position trader.
FAQs
Is a Shooting Star and Inverted Hammer the Same?
While the shooting star and hammer candlestick patterns look the same, they appear at different points in a trend. The shooting star appears after an uptrend, while the inverted hammer appears after a downtrend.
This pin bar vs hammer article clears up another pair of mistaken candlestick patterns.
Is the Inverted Hammer Bullish or Bearish?
The inverted hammer tends to be a bullish reversal pattern that appears at the bottom of a downtrend. However, you should confirm this with other bullish indicators before taking a long position.
Is the Shooting Star Bullish or Bearish?
The shooting star candlestick pattern tends to be a bearish reversal pattern that appears at the top of an uptrend. However, it works better when there is evidence of other bearish momentum in the chart.