What Is a Shadow?
A shadow, or a wick, is a line found on a candle in a candlestick chart that is used to indicate where the price of a stock has fluctuated relative to the opening and closing prices. Essentially, these shadows illustrate the highest and lowest prices at which a security has traded over a specific time period. The candlestick also has a wide part, which is called the "real body."
- In a candlestick chart, the shadow (wick) is the thin parts representing the day's price action as it differs from its high and low price.
- The length and position of the shadow can help traders gauge market sentiment in a security.
- Some technical analysts believe a tall or long shadow means the stock will turn or reverse while a candlestick with virtually no wick is a sign of conviction.
Understanding the Shadow
A shadow can be located either above the opening price or below the closing price. When there is a long shadow on the bottom of the candle (like that of a hammer), there is a suggestion of an increased level of buying and, depending on the pattern, potentially a bottom.
There are two main forms of analysis in trading: fundamental and technical analysis. Fundamental analysis relies on the performance of the company to provide clues and insights about the future direction of the stock. Fundamental analysts track earnings and revenue metrics.
By comparison, technical analysts concentrate on movements in price. They try to identify patterns in price action and then use these patterns to predict the direction of price in the future. Fundamental analysis helps analysts select which stocks to trade, while technical analysis tells them when to trade it. The candlestick chart is one of many tools for technical analysis.
Identifying and Using the Shadow
Every candlestick formation has an open, high, low, and close. The open, high, low, and close refers to stock prices. These are the values that create the candlestick pattern. The box portion of the candlestick, which is either hollow or filled, is referred to as the body.
The lines on either end of the body are referred to as the wick or shadow, and they represent the high or low range for the time or tick period.
Candlesticks are used across various measures, such as time and ticks, and various frames such as one minute, two minutes, 1,000 ticks, or 2,000 ticks. No matter what the measure or frame, the formation and rules work the same.
Some technical analysts believe a tall or long shadow means the stock will turn or reverse. Some believe a short or lower shadow means a price rise is coming. In other words, a tall upper shadow means a downturn is coming, while a tall lower shadow means a rise is coming. A tall upper shadow occurs when the price moves during the period, but goes back down, which is a bearish signal. A tall lower shadow forms when bears push the price down, but bulls pull it back up, which leaves a long line or shadow. This is considered a bullish signal.
A candlestick with no shadow is regarded as a strong signal of conviction by either buyers or sellers, depending on whether the direction of the candle is up or down. This type of candlestick is created when a security's price action does not trade outside the range of the opening and closing prices.