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Monday, September 24, 2007

Understanding Candlestick Formation – Part 2: LONG SHADOWS, HAMMER / INVERTED HAMMER & SPINNING TOP

The following are some common & important candlestick formation (Cont’d):
(Please refer back to Part 1 for the pictures of each of the following formation)

3) Long Shadows
Upper shadows of a candle represent the session high, whereas lower shadows represent the session low.

Candles with a long upper shadow and short lower shadow (the 1st candle in Picture 3) imply that buyers at first dominated at the beginning of the session and push the price higher from the opening. However, towards the end of the session, sellers became more aggressive and forced the price down from their highs, creating a weak close near the opening.

Candles with a short upper shadow and long lower shadow (the 2nd candle in Picture 3) imply that sellers dominated at the beginning of the session and push the price lower from the opening. However, by the end of the session, buyers came and got more aggressive and drove the price up from their lows, creating a strong close near the opening.

4) Hammer / Inverted Hammer
The 1st candle in Picture 4 is actually another form of Long Shadows candle with special characteristics of long lower shadow, no upper shadow, and small or no body (The shadow has the multiple length of the body).
This kind of candle can form “Hammer” (a bullish pattern during a downtrend) or “Hanging Man” (bearish pattern during an uptrend) depending on the pattern preceding it (uptrend or downtrend).

The 2nd candle in Picture 4 has long upper shadow, no lower shadow, and small or no body (The shadow also has the multiple length of the body).
This kind of candle can form “Inverted Hammer” (a bullish pattern during a downtrend) or “Shooting Star” (bearish pattern during an uptrend) depending on the preceding pattern (uptrend or downtrend).

The above patterns are discussed further in the following:
* Hammer vs. Hanging Man
* Inverted Hammer vs. Shooting Star

5) Spinning Top
Spinning Top is a candle that has small body with upper and lower shadows that exceed the length of the body. Spinning Top signals indecision.
The small body (whether hollow or filled) indicates little movement from opening to closing, and the shadows suggest that both bulls (buyers) and bears (sellers) were active during the session.
Although prices moved significantly above & below the opening during the session, at the end the session closed near to the opening. That means neither buyers nor sellers could gain control, signaling indecision.

Continue to Part 3: Doji.

Related Posts:
* Learning / Understanding Candlestick Charts
* Learning Charts Patterns

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