Candlestick Wick Analysis

Candlesticks play an important role in technical analysis, and help understand price movements. Candlesticks give traders a sense of a trend, its continuation or reversal. 

Every candle has a body and two wicks. There are four price aspects to a candlestick: the opening and close prices, the high of the timeframe, ie, a day and the low. The wicks are also called shadows. Depending on the price action, the shape of the candle changes. The wicks are indicative of the highs and lows. 

There are several candlestick patterns that help in technical analysis and many of them are popular.  But even candlestick wicks can be used for analysis and trading. A key aspect of candlestick analysis is to know that though traders can use two wicks for their analysis, usually only one is used for trading. If you were to take up candlestick wick analysis for the top one, then, you would need to find the high of the candle and keep track of the price at that level. Then you would need to monitor the open and close, and pick whichever is the highest of the two. Then, you would need to deduct the high of the candle from the open or close. 

On the other hand, if you were to take up wick trading of the bottom wick, then, you would look at the low of the candle, track the closing and opening prices, and pick the lower level. Then you would subtract the open or close (whichever is the lower) from the low of the candle. 

The above formulae help you compute the size of the wick. For example, if a candle that is bullish has a high of 1.0800, close of 1.0795, an open price of 1.0750 and a low of 1.0746, then the top wick is 1.0800 – 1.0795, which is 5 pips. The bottom would be 3 pip (1.0750 – 1.0747).

What do wick sizes tell a trader?

– When there’s a shorter wick  it means that most of the trading was held between open and close prices of that period. 

– If there’s a long wick, it means that the price activity has gone past close or open. A long upper wick occurs when the high registered is very strong but the close is weak. This means while buyers did show strength, sellers managed to bring the price down again. 

– If the lower wick is longer, it is indicative of the flip: sellers managed to control the session but couldn’t hold on when the buyers pushed price up again. The trading session ended on a strong note. 

As mentioned earlier, usually one wick is considered crucial for analysis. Which wick matters when depends on the support and resistance levels. So, when a price is approaching an important support level, the bottom wick matters because it is indicative of whether there’s a breakout (nearish) below the support or a reversal at the support. Support is the level of price at which there is expectation of a pause in the downtrend. Resistance is the flip of support level. 

Wick percentage

The next step in candle wick trading or analysis is to get an idea of wick percentage. It is arrived at by dividing the wick size with the candle size. 

– A wick of 5 pips and a candle size of 20 pips has a 5/20 or 25 per cent ratio. The percentages help a trader understand which breakout is strong or weak. 

– If it is 0 to 5 per cent, then it is indicative of a highly strong close of the candle, or that either the bulls or the bears are in strong control. 

– When the percentage touches 30 to 35 per cent, it is indicative of indecisiveness, where neither the bulls nor the bears are in control. 

– While the range between 50 and 67 per cent shows a weak close of the candle, the upwards of 67 per cent shows an extremely weak or reversal close of the candle, when the reversal is likely to happen. 

Advantage of candlestick wick analysis

It’s a temptation to focus largely on the candle’s body and track price action and not to track wicks. However, wick trading has enhanced potential to offer a clearer and micro picture of risk and reward cases. The candle body offers signals of an asset’s real price but when there is deviation of an asset from this real or true value, one has to rely on candle wick trading

While wicks give an indication of likely reversals, they can also be used to confirm or validate resistance levels that were earlier supports. 

In summation

Candlestick wicks are an important part of technical analysis and indicate reversals or breakouts. Candle wick trading is all about understanding the size and percentage ratio of the wicks to assess what they reveal, and which breakout is strong or weak. Candlestick wick analysis should be taken up in association with other charts so traders get a clearer picture of the action.