Trend Following Shooting Star Forex Strategy

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Trend Following Shooting Star Forex Trading Strategy

The shooting star pattern is one of the most popular reversal candlestick patterns being traded. Probably because of its simplicity. It is easy to spot, easy to setup a trade.

However, even with its simplicity, many traders still fail to make profit out of this simple reversal pattern. No candlestick pattern has a 100% reliability. What we can do however is to trade these patterns on charts where the odds are in our favor.

But before we go into the trading strategy, let’s examine first how a shooting star pattern looks like for us to be able to trade it effectively.

The shooting star pattern is a reversal pattern that occurs in a single candle. It is formed when price rapidly advances during a trading session forming a new high. However, this rapid increase in price is short lived and retraces back to the lower price levels often closing below the opening price. This scenario forms a candlestick with a long wick on top signifying the short-lived increase price, a small body at the bottom, and a very small wick at the bottom.

Trend Following Shooting Star Forex Strategy 1

It is important to note also that the shooting star pattern is a bearish reversal candle, thus the preceding move is a bullish trend. This signifies that the bullish trend is about to reverse. Also, the long wick at the top of the candle shows that the market is rejecting the higher price levels, thus the candle’s body forms near the bottom.

The 100 Exponential Moving Average (EMA) as Trend Indicator

One of the most common errors that traders make is trading against the trend. Although the shooting star pattern is a reliable pattern, trading against the trend diminishes the probability that a bearish trade would make profit.

To remedy this, we will be using the 100 EMA. The 100 EMA is often used as a mid-term trend indicator. This is determined by the location of price in relation to the 100 EMA. If price is above the 100 EMA, the trend is bullish. If price is below the 100 EMA, then the trend is bearish. Also, the slope of the 100 EMA also indicates the direction of the trend. An upward sloping 100 EMA indicates a bullish mid-term trend, while a downward sloping 100 EMA indicates a bearish mid-term trend.

The Shooting Star Entry Setup

To allow us to conveniently identify shooting star patterns, we will be using an indicator that identifies it for us. The indicator will label these candlestick patterns as SS.

The trading rules for entry are as follows:

  1. The shooting star pattern should be below the 100 EMA
  2. The 100 EMA is downward sloping

Whenever these patterns occur and the rules are ticked, then we enter at the close of the candle.

The Stop Loss

The stop-loss should be placed a few pips above the entry candle.

Trend Following Shooting Star Forex Strategy 2

Trailing Stop Loss Instead of Take Profits

Since this is a trend following strategy, we will be using a trailing stop-loss as our exit strategy. No take-profit levels will be placed. The idea behind this is that we would want to be able to ride the downtrend until we get stopped out at a nice profit.

The trailing stop-losses will be placed a few pips above the minor lower-highs as the trade progresses. As soon as price pushes for a higher-high, we will be stopped out of the trade.

Trend Following Shooting Star Forex Strategy 3

On this sell setup, the trade was stopped out at a profit of 54 pips, while only risking 9 pips. That is a 6:1 risk-reward ratio.

The Failed Setups

Not all shooting star pattern setups are a winner, many do fail. Below is an example of a failed shooting star setup, which would have been stopped out at a loss. However, the next shooting star pattern would have made a lot of profit, covering the losses of the previous setup, plus so much more.

Trend Following Shooting Star Forex Strategy 4

Conclusion

Although there would be many instances that this strategy could fail, but because of its high risk-reward ratio, the strategy still offers a strong edge against the market. Setups with as much 4:1, 5:1, even 6:1 risk-reward ratios could be won with this strategy. And if the average risk-reward ratio is at least 4:1, even if the win rate is just around 30% worst case scenario, the trader could still earn from the market. However, with this type of setup, a good money management strategy should be in place to avoid the risk of ruining your account due to the losses.

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