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What is a Long Upper Shadow Candlestick Pattern And How to Trade With It

07 Dec 2023

Introduction:

Stock prices are subject to high fluctuations. They can rise or fall within seconds, and you need to always be on your toes while engaged in stock market trading. One of the most helpful tools that can aid you in speculating price movements and market sentiments is candlestick patterns. They consist of one or more candles arranged on a price chart and offer visual representations of stock movements during specific trading sessions.

Each candle comprises three distinct components – body, wicks, and colour. The candle's body represents the opening and closing prices during the trading session. A small body denotes that the opening and closing prices are close to each other, and vice versa. The wicks, also known as shadows, represent the stock's highest and lowest price points during a trading session. And finally, the colour represents the direction of the stock movement. 

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This article discusses one of the most significant candlestick patterns – the long upper shadow pattern. You will explore its meaning, significance, interpretation, and associated trading strategies. Keep reading.

What is a long upper shadow candlestick pattern?

As the name suggests, the long upper shadow candlestick pattern is observed when a single candle appears on the price chart with a small body, long upper shadow, and short or negligible lower shadow. Typically, the size of the upper shadow is more than twice the size of the body. The long upper shadow candlestick pattern comprises a single candle that can appear during both bullish and bearish market conditions.

When a long upper shadow pattern appears during an uptrend, it is known as the shooting star candlestick pattern and indicates a potential trend reversal from bullish to bearish. Similarly, when it appears during a downtrend, it is known as the inverted hammer candlestick pattern and marks a potential trend reversal from bearish to bullish.

How to identify long upper shadow candlestick patterns on a price chart?

Both shooting star and inverted hammer patterns are similar to each other in appearance. The following characteristics can identify them:

  • A small body

The body of a long upper shadow candlestick pattern is typically small, indicating that the opening and closing price of the stock during a trading session are pretty close to each other. 

  • Long upper shadow

The most distinct characteristic of these patterns is the long lower shadow extending above the small body. It indicates that the stock surged rapidly during the trading session before it closed near its opening price point.

  • Non-existent lower shadow

Another unique characteristic of a long upper shadow candlestick pattern is an almost non-existent lower shadow. It means that the lower shadow is either completely absent or negligible in size. It indicates the stock moved only in the upper direction post-session opening.

Significance and trading strategies

To understand the significance of the long lower shadow candlestick pattern, you need to look at the prevailing market trend in which it appears. It is a trend reversal pattern, which indicates a reversal of the prevailing trend from bullish to bearish and vice versa. Below are the trading strategies you can consider:

  • If it appears during an uptrend

If a long upper shadow pattern appears during an uptrend, it is known as a shooting star. It indicates that the bulls are losing their dominance over the stock, and bears are gaining strength, thus marking the beginning of a bearish trend. It can be an opportune moment to enter a new short position or exit an existing long position.

  • If it appears during a downtrend

If a long upper shadow pattern appears during a downtrend, it is known as an inverted hammer. It indicates that the bulls are trying to take control of the stock and marks the beginning of a bullish trend. It can be an opportune moment to enter a new long position or exit the existing short position.

To conclude

The long upper shadow is among the most significant candlestick patterns on a price chart. It marks a potential trend reversal from bullish to bearish or vice versa. You can use it to enter a long or short position, depending on the prevailing trend in which it appears. However, you confirm your trading decisions with other technical indicators to avoid incurring significant losses.

 

Related Articles:  Understanding Margin Against Shares | What Is a Symmetrical Triangle Pattern

 

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