Hello friends and welcome to this podcast by Angel One.
In this podcast, we are going to talk about how to interpret candlesticks with long upper shadows, and then some patterns in which you will see candlesticks with long upper shadows.
Let’s do a quick primer on candlesticks before we dive in.
Candlestick charts show price movement of an asset including its opening price, closing price, and day-wise highs and lows. If the candlestick is black, the upper edge of the real body of the candlestick represents its opening price, and the lower edge represents the closing price. If the body is white, then the opposite stands true.
The day’s highs and lows are represented by the lines that extend above and below the body of the candlestick. The upper line is called the upper shadow, upper wick or upper hair of the candlestick, while the lower lines are called the lower shadow, lower wick or the lower hair.
So basically, a long upper wick means that the line that extends upward of the candle is long. What does this tell us about the price movement of the asset? Can we interpret a trend from it?
Yes we can! Essentially, long upper wick means that the asset’s price reached a peak during the day, but the bears drove the price downward.
If the real body of the candlestick is small, it means that despite the push received by the support, the resistance drove the price of the asset close to the opening price. Therefore, a long upper wick implies a bearish trend. Cool, right?
Now, there are candlestick patterns in which you will see a long upper wick. Let’s look at what these are and how you can make informed decisions by reading them right.
But before that, let’s hear about what happened with Shilpa yesterday.
Shilpa was looking at the price movement of stocks of a logistics company. Since she had recently learned to interpret candlestick charts, she considered looking at that instead of the price chart. In the last candlestick, the peak price coincided with a candlestick which had no line at the bottom.
She was curious. Then she looked up online and realised that this is a known pattern which is called the shooting star pattern.
So friends, would you like to know what this pattern is?
Let’s look at it in detail.
Basically, shooting star pattern occurs when the price of an asset is advancing, and can indicate that the prices are falling. A shooting star pattern consists of a bearish candle which has almost negligible to no lower shadow, a small body and a long upper shadow. Generally, traders prefer to wait for the next candlestick to confirm an upcoming downward movement. If the next candlestick is bullish, traders read this as a false signal. But what it does tell you, is that the price is facing resistance around the price range of the shooting star.
Shilpa followed the stock’s price closely for the next few days. She realised that the shooting star was actually a false signal, because on the next day, the stock closed at a higher price than it opened at.
However, if the price does fall on the next day of the shooting star, it is considered a good time to sell or short. Another pattern with a long upper shadow is the doji star pattern. This is a very cool pattern, which can be recognised by its cross-like shape - which means that the real body of the candlestick is almost absent. The doji star can imply different meanings depending on the preceding movements.
Let’s look at them.
If the doji star occurs on an uptrend, it might mean that selling is gaining momentum and buying momentum is losing force to push the price up. As a result, the doji star pattern indicates that the market is indecisive about the underlying security.
Many investors often see this as a signal to end a long position.
However, if you are using candlestick patterns to augment your trading decisions, it is crucial to use thorough technical analysis, since the doji star pattern can also be followed by an upward trend.
If the doji star has no lower wick, it looks like an inverted T. This is also called gravestone doji, and it indicates that the prices of the security moved higher, but the market rejected these levels overall. Since this pattern appears on the top of an uptrend, it gives a bearish signal - which can actually imply a good time to exit a long position.
If the doji star appears at the bottom of a downtrend, it indicates that neither the bulls nor the bears are in control of the trend. However, if you see any supporting signals for a trend reversal, an uptrend might be on the way.
Long upper shadows basically show that the market rejected higher prices and closed near the opening price. This interpretation is what drives the understanding behind patterns with long upper shadows. This is cool, right? Candlestick patterns can be used in conjunction with other technical analysis indicators, which can easily help you determine the right point for entering or exiting from an asset.
So friends, that was all we had for today’s podcast. If you would like to know more about such interesting concepts that drive trading in the market everyday, check out our other podcasts, or visit www.angelone.in