How to get Top and Bottom of Stock?
Have you ever wondered if Nifty would have gone to 12000+ and, interestingly, after that it would have gone to 7500?
Even in the Corona situation, it would have gone to 11000+, and now while typing this article we still don’t know where the top or bottom is.
Let’s see Reliance which went from 900 to 2100+ or Let’s take an example of BAJFINANCE which went from 4500+ to 1800, from there it bounced from support, and now it went to 3000+ way high.
So now we are back to the same question, who would have predicted this movement? Exact Top and Bottom in Nifty or in any stock. Honestly, no one can predict it. If someone can tell you he/she can predict the exact figure, then it’s a lie or simply a common guess to predict the opposite trend or big target of either side.
But what if I tell you we can predict exact trend reversal on the Top/bottom based on a single Candle, and yes, it’s a very commonly occurring candle. Let’s do it.
The first candle which we are going to look for is a paper Umbrella. See the above picture, as the name suggests, there is a body on the upside and a long shadow on the downside.
What it indicates is stock or the Index made a LOW, but then Bulls made entry and bounced back and took stock high to give a good closing on the upside. So to identify paper umbrella candle, check the lower shadow of the candle—it has to be at least double than the body of the candle.
Now, what do you think, the appearance of a paper Umbrella candle on the Top ( in a bullish trend) and on the bottom (in a bearish trend) will have same impact? Think about it. Let’s see the types of Paper umbrella that will answer this question.
Types of Paper Umbrella
Paper Umbrella consists of two types, namely, based on their appearance on a chart. It’s a Hanging man which appears on top and a Hammer candle which appears at the bottom. Let’s study them one by one.
It’s a single candle which appear in the ongoing Bullish trend suggesting there will be a trend reversal.
Example of Hanging man candle
See the above candle which is circled it. There was a bullish trend for three days, and on the fourth day, stock hit low near 1275 after opening, but Bulls managed to make a comeback and take it up to 1200 and gave closing near 1190. Now, if the Bulls make a comeback one day, it has to be a good sign for the coming trend, right? Apparently it’s not.
Its a Hanging man candle which appeared on top and Bulls got weak after that candle. There was a consolation for a while, and then once stock closed below the low of that hanging man candle, it got more weak, and it went up to 1050. But how you will trade using this candle. Let’s see another example.
How to Trade using Hanging man candle
We can see two paper umbrella candles, The hanging man not the perfect one but in reality as we said in MARUBOZU article that there will be some variations in the above chart of Relaxo. So here the lower shadow is nearly double of the body or even more than that.
Let’s check hanging a man candle before Bearish Marubozu.
The hanging man appeared and made the high of the stock of 790. Now that’s your stop loss, so if there is the closing of any candle above this price, then you exit your trade, and you can see immediately a big red candle appeared giving closing near 725 and then kept going down till 675 till it started to Consolidate. The moment you see the next candle, it breaks the high of the previous candle, I think it’s a good sign for safe and risky traders to exit shorting that stock.
We have seen a hanging man candle now, let’s see a candle which has exactly the opposite candle and another type of paper umbrella.
Hammer candle is the same in dimension and size with hanging man—it looks exactly like it, but, as I said, its appearance is exactly opposite to the Hanging man.
Hammer candle is a single candle and a bearish trend reversal candle. It appears at the bottom where the ongoing trend is bearish, the appearance of this candle suggest that a trend reversal is about happening. Let’s see example first, then we will see how to trade based on the hammer candle.
Example of Hammer candle
This is the Monthly chart of Nifty50 as you can see above. You can see Nifty made a big fall from 12000 to 7500, and in the month of March month gave closing near 8500. Now the next candle is the bullish candle in the April month. What we got in May month is Hammer candle, which means Nifty again went down, but Bulls managed to give up closing above 9500. And see the effect of the Hammer candle Next two months, Bullish candle in the June month and much more Bullishness in the July month as well. Let’s see the second example now In the Nifty daily chart.
Now in the above picture see the hammer candle appeared on 16th July making high of 10755 and since then an ongoing Bullish trend in Nifty till 11292 and now Bullish Marubozu candle formed so more upside expected. Almost 5% return on just one candle and yes still Stop loss safe. But how to find stop loss ???
let’s see , How to Trade using Hammer candle
See the above picture here. At the moment just note down the word “ shooting star candle”, focus only on the hammer candle.
Here the Hammer candle has a LOW of 22830, OPEN of 22860, HIGH of 22869, and CLOSE of 22865. Now after the appearance of this candle, we will initiate a buy, and our Stop loss will be LOW because of this hammer candle, which is 22830. And you will be without breaking this Stop loss Nifty bank went above 23000. Later formed a Shooting star formation and made bearish Marubozu breaking our stop loss. So almost 5% return by just one candle if you find and trade it with Discipline.
Now the interesting part is there is exactly opposite candle in the shape of a Hanging Man and a Hammer. Which also helps a lot in finding the top and bottom. Based on that, we have two types, Shooting star which appears at the Top and an Inverted hammer which appears at Bottom. Let’s see the Inverted hammer first.
Inverted hammer candle
Inverted hammer candle is a single candle appearing at the bottom. Inverted hammer candle is exactly opposite in shape that of the hammer that’s why the name is an Inverted hammer, but it has same effect on the ongoing Bearish trend and does the trend reversal. As you can see in the picture, Bears pulled it down, but lastly, Bulls managed to make entry and pushed stock up at the bottom. Let’s see an example and how to trade in an inverted hammer.
Example of inverted hammer candle and how to Trade using this candle ?
See the above daily chart of Rallis. Inverted hammer candle appeared on 9th July after the stock had already gone down till 260. But after the Inverted hammer candle formed, see the upside and yes, the low of the Candle, our stop loss which is still safe. Now let’s focus on the final candle—the star candle.
Shooting star candle
Have you seen a shooting star in the sky? IN real or in the video? It’s the same star which is falling, and that’s why the name here is for this candle. Because this candle has a long upper shadow and body on the downside. Its shape is just like an inverted hammer.
Example of shooting star and how to trade ?
We just saw same example hammer candle, and we noted a shooting star there, remember?
See the effect of shooting a star candle—in this candle we take high of the candle as to stop loss. The nifty bank already went from 22869 to 23000+ but the moment the shooting star appeared to see the Big Bearish candle after that. In just one Red candle it broke the low of a hammer candle, and the Nifty bank gave up a gain of 13-14 days in just one day.
How to remember these candles?
1. As the name Suggest Hammer and an inverted hammer are opposite in shape, and a hammer and a hanging man are same in shape. So can you guess which other two candles are in same in shape ? Shooting star and Inverted hammer.
So when we talk about shape, not appearance.
Shooting star = Inverted hammer
Hammer = Hanging man.
2. Now let’s talk about appearance.
Shooting star and hanging man, as the word suggests, both appear in TOP and the other two candles at bottom are? Yes, Hammer and inverted hammer.
So when we talk about appearance, not shape
Shooting star, hanging man = TOP
Hammer, inverted hammer = Bottom
3. Now the lets see effects of these candles. Just remember anyone candle, it will help you remember others. For example , hammer is a Bearish trend Reversal candle, and you know, an inverted hammer has same effect as well. Other two will be opposite, a shooting star and a hanging man. Bullish trend reversal.
4. If the 3rd point can’t help, then remember this way: Hanging man and shooting star appear on the Top. So we have bullish trend and both these candle will be bullish reversal candle on top. And the other two will be? Yes, you guessed right.
So a Shooting star and a hanging man candle = Bullish trend reversal candle.
Hammer and inverted hammer = Bearish trend reversal candle.
For more hints, see the pictures we posted just below the name while describing the candle shape and effects. And remember to practice them regularly and also apply and try to find out in the live market as well. Just like knowing a new friend or knowing a new game/app you like. Believe me, once you master them, you will be able to identify TOP and BOTTOM in the chart very easily.
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