In the foreign exchange market, we can often see candle candlestick patterns with long shadows. This special candlestick pattern can usually provide us with some very valuable special signals; understand the signals or characteristics implied by the shadows, Will be able to give us a great deal of help.
Candle patterns are often ignored because they are actually the most basic and simplest. Today I will show you:
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What is a long shadow?
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How to identify a long shadow on the forex chart?
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What does the long shadow tell us in foreign exchange trading?
01 What is a long shadow
Usually in a certain candlestick, if the upper and lower shadow of the candle is much larger than the actual part of the candle, it is a special long shadow candle. This kind of figure is very easy to identify and distinguish. The high and low points of the shadow represent this The price changes during a period of time are very large. At this time, the K line can usually provide us with very important trading signals.
Since the upper and lower shadow lines are often much longer than the physical part, it usually means that the price has a very large support or resistance at this position, and then quickly pulls back to the previous position, like a spring. The greater the pull, the stronger the rotation. Big. At this time, the high and low points touched by the upper and lower shadow lines usually indicate that this position has very strong support or resistance. Using this feature, we can look for potential trading opportunities.
02 What does the long shadow tell us?
Candles with long shadows, like shooting stars, doji and hammers, in most cases also suggest a price reversal. Let's look at an example:
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New Zealand dollar/yen long shadow candle
The chart below shows the weekly chart for NZD/JPY. Highlighted in blue is the long candlestick before the exchange rate reversal. In other words, if the longer shadow line is below the body of the candle, the price will rise.
Conversely, if the longer shadow line is above the body of the candle, the price will fall. These extended shadows provide traders with valuable information very intuitively.
The long shadow line below the candle means that the bears can drive down prices significantly. However, the bulls can push the price back up, showing the strength of the bulls. As the bulls have overcome the selling pressure of the bears, their power may continue, leading to higher prices. The same principle applies to the long shadow line that appears above the candle-but in the opposite direction.
03 How to use long shadow lines in trading
The first step in using long shadow lines is to identify trends. If the trend is down, you will see a long shadow on the top of one (or several) candles, indicating that the price is more likely to fall in the direction of the market.
Continuing to take the downtrend as an example, if the exchange rate retreats (counter-trend movement) or consolidates at the resistance level or the Fibonacci level, traders will look for a long shadow line above the top of the candle formed along the resistance line for two reasons :
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These long shadow lines indicate that the exchange rate may move downward in the trend direction;
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The top of the extended shadow line is a very effective stop loss position.
There are many ways to set a stop loss. Usually the price can go to the top of the impact, but it rarely exceeds the shadow line. Therefore, placing the stop loss point above the shadow line is a more effective stop loss point. For shadows that are themselves at key support or resistance levels, their trading implications are even stronger.