What Is 'Short Line Candle'

Short Line Candles – also known as short candles – are candles on a candlestick chart that have a short real body. This one-bar pattern occurs when there is only a small difference between the opening price and the closing price over a given period. The length of the upper and lower shadows – representing the high and low for the period – do not make a difference in defining a short line candle. In other words, a short line candle may have a wide or narrow high and low range for the period but will always have a narrow open and close range.

 

Breaking Down 'Short Line Candle'

Candlestick charts are often used to assess positive or negative market sentiment at a glance. Short line candles generally signal that the market is consolidating with little price movement. But they may have different meanings, depending on where they occur in a price chart. For example, a short line candle may take the form of a hammer in which there is a lower tail with no upper tail. This is a bullish reversal pattern and could indicate the end of a downtrend. On the other hand, a series of short line candles could simply suggest indecision and provide traders with few hints about where future prices are headed.

A series of short line candles with narrow high and low range indicates a period of low volatility. When these candles are positioned near broader support or resistance, the cluster of candles often predicts the onset of high volatility, i.e. a series of wider range and directional candles consistent with a developing trend. While these clusters tend to be bullish near resistance and bearish near support, their directional value is limited. However, since they predict that high volatility will replace low volatility, traders can apply a basket of potentially profitable strategies.

For example, buying a security in the middle of a cluster at resistance will permit a tight stop loss due to the narrow range candles and even narrower real bodies. Reward to risk is favorable in this scenario because, if correct, the trader benefits from the new uptrend and if wrong, the incurred loss is relatively small. The cluster also benefits option traders who execute non-directional strategies that will generate profits from trend movement in either direction. This is possible due to the assumption that a high volatility directional move will result from the non-directional low volatility cluster.

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