Ever glanced at a chart and spotted a curious candle with a long, thin line poking out beneath its body?
Well, hats off to you, my friend…
You’ve just uncovered a long lower shadow candlestick!
Now here’s the kicker:
Among the myriad of candlestick patterns out there, long lower shadow candlesticks are arguably the most valuable to decipher. These unique formations appear when banks and other large market players carry out one of three trading actions:
- Enter buy trades to reverse a downtrend
- Take profits off currently open short trades
- Close existing short trades.
And the cherry on top?
By mastering the art of spotting and interpreting long lower shadow candlesticks, you can peek into the banks’ playbook and anticipate their moves in advance.
(Sounds like some serious wizardry, right?)
Well, brace yourself, because in today’s post, I’m going to show you how to find and use long lower shadow candlesticks in your trading.
So, are you pumped and ready to dive in?
What Are Long Lower Shadow Candlesticks?
Ever noticed those candlesticks sporting a long, slender line stretching out below their body, usually popping up towards the tail end of down moves or downtrends?
Sounds familiar, doesn’t it?
Well, surprise, surprise…
You’ve been spotting long lower shadow candlesticks all along!
Let’s take a peek at some examples…
Those strange candles you see marked above?
They’re what we like to call ‘long lower shadow candlesticks’.
These candlesticks always carry a long shadow (also known as the wick or tail) below their body, while above, you’ll see a tiny shadow – or sometimes none at all. They tend to form towards the end of downtrends or significant downturns, signifying a surge of demand from buyers.
So, spot a candle sporting a long line beneath its body?
You’ve got yourself a long lower wick candlestick.
(Stay tuned, I’ll delve deeper into the different candle types later)
Now, let’s look at a few more examples…
Puzzled about how a long lower shadow candlestick forms?
Let me break it down for you:
When heavy selling enters into the market, price plummets to new short-term lows, laying the foundation for our long lower shadow candlestick. Then significant demand (a.k.a. buyers) storms in and thrusts the price higher.
This demand pushes price back near the candle’s open, leaving behind…
You’ve got it…
A lengthy lower shadow beneath the body.
The shadow shows the buyers resisted the heavy selling, signaling downside weakness – and potentially a reversal in the short term.
Pretty straightforward, right?
Side note: While long upper shadow candles are usually seen as bearish, the actual candle can swing both ways – it can appear bullish (green) or bearish (red).
What Do Long Lower Shadow Candlesticks Inidcate?
Here’s where things get really interesting…
At a casual glance, long lower shadow candlesticks seem pretty run-of-the-mill, providing pretty standard price information that’s no mystery to anyone:
Demand is hitting the market, hinting at weakness on the downside.
But that’s just the textbook definition.
What’s actually going on?
Long lower shadow candlesticks reveal the moves and intentions of banks and other smart money traders, specifically when it comes to buying.
Let’s dissect this…
Long lower shadow candlesticks form when heavy selling is drowned by an onslaught of buying. That’s what triggers a price reversal, casting the shadow. The only traders with enough clout to reverse price amidst heavy selling are, unsurprisingly, the banks… no elaboration needed there.
But here’s the key question:
Why on earth would the banks buy into a selling frenzy?
Well, there are three likely explanations:
- To take profits from open sell trades.
- To close and exit open sell trades.
- To enter new buy positions.
Keep in mind: The banks need a sea of sellers to take profits or exit existing sell positions. They must buy back some of what they sold – without sellers, no deal.
So, what’s behind the formation of the long lower shadow candlestick?
Is sadly beyond the purview of this article.
Unraveling why the long lower shadow candle formed would require some heavy-duty analysis, which we just can’t squeeze in today. We’d have to scrutinize where the candle popped up, the surrounding technical levels, and the current and long-term trends in relation to the banks’ moves.
But, here’s the key point to remember:
Most long lower shadow candlesticks form due to banks taking profits from open short trades.
And why’s that?
Because they’re always making money, obviously!
Banks need to regularly pocket profits, thanks to their trades generating consistent profits. The only window they have to cash out? When masses of sellers enter the scene – i.e., when price is tanking, just like we see during the formation of long lower shadow candlesticks.
Starting to click now?
Let’s run through a quick example…
Take a look at the retracement above… spot those candles?
Right before the retracement kicked off, a series of long lower shadow candlesticks popped up, a tell-tale sign that someone (yes, we’re looking at you, banks) kept buying up all the sellers.
Why would they buy after a significant downward swing?
To rake in profits, of course.
The banks strategically capitalized on the intense selling spree during each long lower shadow candlestick formation to cash in on the short trades placed earlier in the downtrend. The downward trend has substantially increased their profits, and naturally, they’re itching to collect.
So, what’s the aftermath?
We witness a sizeable retracement back into the previous downswing – the bank’s profit-taking spree triggered a short-term reversal to the downtrend.
Their next chess move?
Reload shorts for the upcoming downswing.
Oh, those sly banks!
Can you see the power of long lower shadow candles now?
Recognizing that these candles typically signal profit-taking can offer early warning signs of imminent reversals or retracements. This rings particularly true when a flurry of these candles pops up in a short span, just like in our example.
3 Common Types Of Long Lower Shadow Candlesticks
Here’s the deal:
Any candlestick with a long lower shadow can be considered a long lower shadow candlestick, regardless of any other features the candle may have.
That said, 3 main types of long lower shadow candles exist:
- Doji Candles
- Profit Taking Candles
Let’s go over the 3 types now and I’ll explain how to use each in your trading…
#1: Hammer Candlesticks
You’ve seen these before, haven’t you?
Hammer candlesticks – they’re the bullish twin of shooting star candlesticks. (Want more insight? Head over to my post about long upper shadow candlesticks)
So, what’s their deal?
Hammer candlesticks form when the open, high, and close exist around a similar price. This gives birth to a candle with a small body and a long lower shadow. The lengthy lower shadow forms when intense selling is met by strong buying, courtesy of the banks.
Key Point: The shadow on a hammer candlesticks must be at least twice the size of the candle body.
Why does a hammer form, you ask?
It’s all down to the banks buying executing one of the three actions listed earlier: taking profits/closing open short trades or entering buy trades to kick off a reversal.
In most scenarios, it’s about taking profits.
Occasionally, however, it’s about firing up new longs.
A hammer signaling a reversal will almost always feature a massive long lower shadow. The shadow should jut out from the surrounding price action, catching your eye with a quick once-over. (More on how to find and trade these in the next section)
How To Interperate Hammer Candlesticks
Hammers signal either profit taking or trade placing, so the two best ways to use them in your anaysis is as early warning signals of reversals and retracements.
Keep your eyes peeled for a series of hammers forming one after the other.
These indicate the banks are taking profits from existing short trades. The long lower shadow indicates massive buyers soaking up intense selling pressure – only banks have the money and muscle to buy in such large quantities.
Keep In Mind: If you spot a cluster of hammer candlesticks popping up in quick succession, be on high alert for a potential price reversal at a significant technical level nearby.
Keep an eye out for a hammer with a whopping long lower shadow.
The length of this shadow directly ties to the number of traders who sold during the candle’s formation: the longer the shadow, the higher the number of sellers during the drop.
Why should you care?
The more sellers in the mix, the more the banks can buy.
A sea of sellers lets banks plunge into massive buy trades, dramatically boosting the odds of a reversal post-hammer.
Here’s a crucial point: Reversal hammers might be flanked by smaller, standard hammers either before or after they form. These hammers aren’t born out of profit-taking, but rather they’re the result of banks making smaller trades alongside their main position, which triggered the reversal hammer.
#2: Dragonfly/Long Legged Doji Candlesticks
Dragonfly and long legged doji patterns also fall under the long lower shadow candlestick umbrella.
(Let’s start with dragonfly doji’s)
Meet the dragonfly doji – a unique candlestick with a long lower shadow that forms when the closing price terminates close to the opening price, or even matches it.
The structure of this formation bears a striking resemblance to its cousin, the hammer candlestick. Both candlesticks form the same way: buyers (aka the banks), rally against strong selling, creating a distinct long lower shadow.
Now, you might be wondering, why are the banks buying?
You’ve nailed it.
They’re taking profits!
Spotting a series of dragonfly dojis?
That’s the banks cashing in, taking profits from their open short trades. Keep an eye out for this scenario, because it often means that the momentum for a price drop is losing steam. Brace yourself for a possible retracement or consolidation in the market.
So, stay tuned and watch the market action unfold!
How To Interperate Dragonfly Doji’s
Dragonfly dojis and hammer candlesticks – they’re practically the same!
The process of constructing both types of candles is the same, barring a minor adjustment in the opening price. So what does this mean for us traders? Well, we treat them the same when they pop up on our charts: as signals the banks are pocketing profits from open short trades.
But hey, don’t just take my word for it.
Let’s jump into a quick example…
Before the retracement above kicked off, multiple dragonfly doji (red arrow) and hammer candlesticks (green arrow) formed.
What’s up with that, you ask?
Well, it’s the banks, cashing in their profits!
Here’s the deal: the banks were leveraging the sellers generated during each candle’s initial drop to rake profits off their short trades placed earlier in the downtrend.
And how do they profit off a short?
Simple – they buy back some or all of what they initially sold.
But here’s the catch: this can only happen if there’s a swarm of sellers free. The more profits the banks want to pocket, the more sellers who must be free.
That’s why multiple long lower shadow candlesticks form before the retracement: there simply aren’t enough sellers available, forcing the banks to take profits in installments.
So, what’s the key takeaway?
Multiple dragonfly dojis and hammer candlesticks on your chart could be an early sign a possible retracement, reversal, or consolidation is just around the corner.
Watch for the reversal/retracement to begin at one the following levels:
These areas are teeming with pending sell orders, making them prime targets for banks to drive price and take profits or enter new long trades. So, keep your eyes peeled for sizeable hammer candlesticks and clear engulfing patterns – they’re your sign that the retracement or reversal has begun.
Long-Legged Doji Candlestick
You’ve probably come across a Long-Legged Doji while poring over candlestick charts, but what exactly is it?
In short: a candlestick with a long lower shadow that appears when the price closes close to its open, despite making two shadows of similar length at the top and bottom. It’s a bit like a tug-of-war, with buyers and sellers duking it out but ultimately reaching a draw.
So, what does a Long-Legged Doji signify?
Acorrding to the textbooks: Indecision.
The long shadows reveal neither buyers nor sellers could clinch the victory.
In essence, supply and demand are in balance.
Key Point To Remember: The long upper and lower shadows on a Long-Legged Doji should be reasonably large, suggesting the presence of profit-taking. On the contrary, shorter shadows typically reflect minor market fluctuations rather than major trading activity by banks.
While you might spot these more frequently on lower timeframes, don’t be surprised to see them forming on higher ones too.
But here’s a mind-boggler for you:
Ever wondered what causes the long lower shadow?
Well, somebody’s got to soak up all those sellers, right?
Only one suspect fits the bill… and yes, you guessed it – it’s the banks!
The banks swoop in to mop up the sellers, pocketing profits just like with most other long lower shadow candlesticks. Sure, the sellers put up a fight, but the banks cleverly exploit the initial selling spree to cash in on open short positions, which then leads to the formation of that long lower wick.
Makes sense now, doesn’t it?
How To Interprate Long Legged Doji Candlesticks
Just like their long lower shadow candlestick cousins, long-legged doji candles typically signal that banks are cashing in on their open short trades.
But there’s a twist…
The candles are not quite as reliable as you might think.
While the long-legged doji does suggest banks are pocketing profits, it leans more towards them expecting the current move to continue, rather than signaling a retracement or reversal.
You can spot this by looking at the long upper and lower shadows of the candle.
Here’s a thought:
Why would the banks allow sellers to push price back to the opening level if they were anticipating a price reversal or retracement soon?
Doesn’t quite add up, does it?
That’s why the long-legged doji plays second fiddle to other candle signals.
Sure, the doji still hints that the banks are taking profits, but it’s not as strong a sign of a reversal or retracement compared to the other long lower shadow candlesticks. Take note of its presence, but look to other candles for confirmation that a retracement or reversal might be on the cards.
#3: Profit Taking Candlesticks
And finally, we come to a curious category: profit-taking candlesticks.
Now, you might be scratching your head, wondering,
‘Profit-taking candles? What on earth are those?’
Well, let’s unravel this together.
In essence, profit-taking candles are a nickname I use for long lower shadow candlesticks that don’t quite fit into the other types. These candles always show a sizable lower shadow, typically paired with a more substantial body, which may or may not come with an upper shadow.
Think of candles like these, for instance…
Notice how the body is way bulkier than the others?
These profit-taking candlesticks are born almost exclusively from banks reaping the profits of short trades. The larger body implies that the downside momentum remains strong, hinting that the banks are rooting for the price to keep falling rather than reversing.
However, here’s a vital caveat: while profit-taking candles typically signal profit-taking, these candles can hint at a reversal if the body shuts in the opposite color.
So, keep your eyes peeled!
How To Interperate Profit Taking Candles
As profit taking, of course!
No, but seriously – profit taking candles aren’t much help in analysis.
The candles indicate the banks are taking profitss from shorts, however, the fact they expect price to continue lower rather than reverses means they don’t hold much value. Consider them a slight sign of weakness, but always look for other confluence factors for confirmation.
Here’s the key factors:
- Other long lower wick candlesticks
- Major demand zones/support levels
- Prominate pschological numbers.
The Bottom Line
Spot a candlestick with a long lower shadow?
It’s the market’s subtle nudge saying, “Psst… the banks are buying right now!”
Essentially, it’s a sign that even though sellers tried to drive the price down, bank traders came in and used the sellers to execute their own trading actions. Keep an eye out for these patterns in a downtrend or at crucial support levels/demand zones.
Read it carefully and trade smartly!