Candlestick analysis has always been an essential aspect of technical analysis but such an analysis focuses on the body of the candle. However, wicks or shadows form a key aspect of the candlestick simply because they indicate extreme price levels, ie, the high and low of that particular trading session.
Wick trading therefore looks at the price ranges that form outside of the day’s open and close prices. The size of the wick matters a great deal while looking at wick trading strategies. Also, it is important to bear in mind that usually only one wick is traded.
Long wick candlestick trading
When the wick is short, it is indicative of trading that was mostly held between open and close prices of that period. On the other hand, when the wick is long, it signals that the price action has crossed the borders of the open and close prices. However, there’s a difference between a long upper wick candlestick and a long lower wick stick. A long upper wick candlestick occurs when the high is extremely strong but then the close price is weak. This means that although buyers tried to dominate a major part of the session, the sellers eventually managed to bring down the price.
If the lower wick is longer, it is indicative of a trading session that ended on a strong note where there was dominance by sellers but the buyers managed to push prices up.
How does one spot a long wick candle?
– Look for long wicks that are below or above a candle that is significantly longer than the surrounding ones.
– Spot price levels that are likely to occur in coincidence with the long wick; signalling support or resistance levels.
– Use the levels and the long wicks in conjunction to see if there are any trade prospects.
How does one trade a long wick candle?
The first step is to identify a trend.
– In a downtrend, if you spot a candle or many with longer wicks on the top, it means there is a strong chance for the price to move down in the market direction.
– A long wick can be traded as a reversal pattern when it is spotted at the bottom or top of a trend which is a short one.
– It has to be confirmed or validated by resistance or support levels. Support is the level at which there is likelihood of a pause in the downtrend. Resistance is the opposite of support level.
– A long wick candle typically occurs when a trend is ending and shortly before there is a price action reversal, forming a fresh opposite trend.
So, what explains formation of long wick candlesticks?
Long wick candlestick trading occurs in a scenario where the prices are under a test and then get rejected. Wicks are considered areas of rejection. Even before a long lower wick is seen, it is a long bearish candle where bears are in control, and the bulls start putting pressure on prices to move up. The prices start inching up and reveal a greater lower shadow. What was earlier a bearish and long candle will now be a long lower wick. Similarly, a long upper wick candlestick begins with a bullish candle and as the bears start showing control, prices begin to drop and reveal a greater upper wick or shadow.
What happens when both wicks are longer?
Usually, the upper and lower wicks are not equal. But there are times when neither of the wicks is longer than the other. Such candlesticks have a long upper wick and a long lower wick and the body is small. When such a candlestick is seen, it is called a spinning top. This indicates that there is a stalemate between bulls and bears, both of which were trading actively.
When there is no wick at all…
There are times when a candlestick has no wick at all. Then it is called a marubozu candlestick. A black marubozu is when the open price is equal to the high, and the closing price is equal to the day’s low. A white one is the flip.
These are situations that show that wick trading not only involves long or short wicks but no wicks or equal long wicks! Wick trading matters a great deal because wicks tell us all about supply-demand shifts, sentiment of the market or news that affect price changes.
To sum up the characteristics of the long wick:
– A long upper wick shows that there is not adequate demand at the high price level to push a stock further up, at least over a short term.
– A long lower wick shows that the low price is being rejected. This means a bearish trader is profiting on short positions and a bullish trader is taking a long position.
Long wick candlestick trading involves looking for long wicks to understand if they are lower or upper and if there’s a price movement following in the opposite direction.
