I was watching my nieces and nephews chasing each other around hedges and trees, screaming "tag!" at the top of their voices...as I sat drinking tea with my aunts at a family picnic last year. My aunt Anita commented that 6-year-old Anil was going to be great at basketball one day.
None of us could understand how she came to such a specific conclusion from watching him chase and be chased so she explained….“Because of his long legs,” she said, confidently…. “He’ll have an easier time dunking the ball into the basket.”
Anil’s long legs were an indicator of his potential as a basketballer to Aunt Anita. Similarly, a long leg, long wick or long shadow on a candlestick pattern, is often seen as an indicator of upcoming stock price movements for stock market traders.
So…. how does one spot a long lower shadow candlestick? what does it mean?....and how should a smart trader play it? We’re going to explore all of that right here and now.
Let's start with how to spot it?
Well the same way Aunt Anita spots potential basketball champs of course, by their long legs!
Alright to be a little more serious and specific, you are looking for a long leg, long wick or long shadow in the candlestick pattern.
As some of you might know, the cylindrical or rectangular portion of a candlestick is known as its body. It represents the closing and opening price of the period that it measures, most often this period is one day. The upper and lower shadows, legs, wicks … however you may choose to refer to them… refer to the high and low prices of the day respectively.
A long lower wick or long lower shadow is a clear indication, therefore, that the stock price fell drastically as compared to its opening price during the course of the day.
For a candlestick pattern to qualify as a long lower shadow candlestick, the lower shadow must measure two-thirds or more of the entire length of the candlestick (with both wicks and its body).
Now that we're clear on how to spot a long lower shadow candlestick, let's find out what considerations are drawn by traders when they do catch sight of a long lower shadow candlestick:
Traders consider a long lower shadow candlestick to be a signal of impending price reversal.
If a long lower shadow candlestick is spotted during a bearish trend, it is called a hammer and is seen to signal an impending bullish trend. Traders expect the stock price to pick up. As a result, one would opt to trade long or to buy stock hold the stock … that is wait to sell at a higher price
Conversely, if it is seen during a bullish trend, it is called a hanging man and is seen to signal an impending bearish trend. Traders expect the stock price to drop. As a result, one would opt to trade short or to sell one's stock.
However before putting their money where their prediction is, traders will usually wait for the stock price to confirm the signal.
For instance, if a long lower shadow appears during a bearish pattern, the trader will usually wait for a confirmation by way of a price increase. Only when he spots that increase will he be somewhat certain that his prediction is indeed panning out correctly.
So how does the trader play it once he is reasonably sure that the stock price is moving as per his prediction?
When the trader spots a hammer, or a long legged shadow candlestick that appears during a bearish trend, he waits for the price change and then places a buy order, placing his stop loss below the body of the hammer.
The traders plays it in reverse when he spots a a hanging man, or a long lower shadow candlestick that appears during a bullish trend. Here, he places a sell order and sets his stop loss at the upper wick of the candlestick.
Long lower shadow candlesticks are found very commonly on stock graphs. Traders often complain that they are rather unreliable when looked at in isolation and instead like to use them in conjunction with other indicators such as volume. In the case of a hanging man, or a long lower shadow candlestick that appears during a bullish trend, traders will look for increased volume. In the case of a hammer, or a long legged shadow candlestick that appears during a bearish trend, many traders are very cautious about making any moves and will use many other candlestick patterns for confirmation.
However the truth is that even a price confirmation in combination with confirmation by several other indicators is no 100% guarantee that the trader's production of a bullish trend will end up being correct. This is because the stock market itself is unpredictable… it swayed by a number of forces and truly, anything could happen. Base your trading decisions on a variety of indicators and thorough stock market knowledge. Start small and trade with small amounts until you find your feet. Knowledge of the company whose stock you are planning to buy us also essential. Consider your risk appetite before investing.
Visit www.angelbroking.com today to see how easy it is to trade in these markets. And for more knowledge on markets and trading strategies, don’t forget to check out our other podcasts. Until then, goodbye from Angel Broking and happy investing!