Hi IHSC,
The sizes of the shadows and which direction they are "pointing" (up or down) can be very significant. The same with the real bodies. We rely on these things, this is an important aspect of technical analysis. But they generally cannot be properly interpreted without also considering the context in which they occur.
For example, a narrow range day with a tall shadow above AND below (sometimes called a Doji if the open and close are the same... looks like a cross) is a pretty good indicator that reversal is about to occur, but which way? Well, that depends upon what leads up to that candle. If the stock (or whatever) rallies, then forms a Doji, the reversal will be to the downside. If a stock is correcting and forms a Doji, just the opposite: the stock will change trends and begin moving up.
I think it is important to try to understand what is happening in the markets that leads to the formation of candles in the first place. In the example of the Doji occurring after an uptrend (in any time frame... intraday, daily, weekly, monthly, whatever), then the stock opens at some price, and trades in one direction. Let's say it trades down first. It moves down further and further on the day, but then encounters buyers, and begins moving up. Then, it continues rally above the opening price, moves up and up, but then encounters a wall of sellers, who push the stock back down. The day ends in a draw as the stock closes right where it started in the first place.
The important thing here is that the stock had been in the hands of the bulls since it was uptrending. But on the day of the Doji, the battle between bulls and bears ended in a draw. This strongly suggests that the tide is shifting, and the bears will now begin to dominate going forward.
I think it will help to try to visualize how trading patterns lead to the formation of particular candles.
Here's what a Doji looks like:
stockcharts.com
You may know already, but Japanese candlestick analysis has been around for centuries.
T |
