What really is a Shakeout?
Not all lower wicks :)\
I think, therefore I am!
My Peak Aspiring trader,
I hope you are doing well.
Today, I am going to talk to you about:
What the hell is a Shakeout?
Examples of shakeout in different timeframes.
So, what is it?
A shakeout is a price action where a down move at the end of a correction, is quickly negated by an up move on the same candle or the subsequent candle(s). Hence a peak shakeout can be a single candlestick pattern or a double candlestick pattern (or even a triple candlestick pattern).
Importantly, this down move should take the price out of a well-established range, a key pivot (eg. the previous swing low, a key gap boundary), or a key moving average that the stock price has been respecting for some time. And the up move should bring the price back into the range or the pivot. If this quick down-up move happens inside the range (or doesn’t breach an important pivot low), it cannot be called a shakeout.
Why?
The theory is this:
Because, as the down move breaches a key pivot (or MA), there is a high possibility that this move would trigger many Stoploss limit sell orders of the trend-following traders/investors. Shaking them out of the trade, before reversing swiftly. Hence the name “SHAKEOUT”.
This series of sell orders bunched around similar price levels makes the level a high liquidity area. When triggered, it accentuates the quick down move. This in turn provides the liquidity that institutions crave. They come in with their big buy orders in a short span and drive the price upwards just as quickly as it took for it to fall.
The term shakeout also comes from the act of shaking a tree. The weary leaves or the ripe fruits fall, and the strong-virile leaves are still clinging to the tree.
Hence the term, “shaking out of the weak hands”.
Fun fact.
It is often believed that this action is a planned maneuver by the smart money to shake out the weak hands (like you and me, retail) and accumulate more shares before marking the price up higher. I have no way to test this though.
This event can happen in any timeframe (as with any other event in the market, it’s fractal). See some examples below in daily, weekly as well as intra-day.
3 kinds of shakeout patterns:
Single candlestick shakeout: Bullish Pinbar (Hammer).
It’s a candle that has a long tail.
I prefer a tail that is at least 3 times the length of the body or a tail more than 4-6% long.
Double candlestick shakeouts: Bullish tweezers or Bullish engulfing (google them or maybe I will explain them later).
Three candlestick shakeouts: Mostly a pattern called the morning star. A big red candle is followed by a long-tailed doji (either of these 2 can push the price out of the pivot), which is followed by a bullish candle that takes the price back to the other side of the pivot.
Now, let’s look at some examples.
ITC in daily: Shakeouts marked in the red circle.
Mankind: Shakeout in daily below IPO low
Peak shakeouts in KPIT:
A weekly shakeout in DSSL:
A shakeout in a 60-minute timeframe in Olectra.
2 candle stick pattern shakeout: (Tweezers)
3 candlestick pattern shakeout (the morning star pattern) in ICIL weekly:
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This is all for this weekend,
I will see you in the next one. Till then,
Don’t stop asking those stupid questions.
~ Homma
Some Peak Scanners for you:
Pullback to 10/21 MA: https://chartink.com/screener/copy-shpb1021
VCP (long-term timeframe): https://chartink.com/screener/shvcp-epic-modified
Parkash bhai really like your content
👏✨
awesome content bro; learnt a new thing about shakeouts from this.