With respect to candlestick technical analysis, most traders focus only on the candle bodies rather than the shadows. Candle shadows, also known as candle wicks, are also an integral part of technical analysis. They’re often misunderstood and misinterpreted by traders, and this leads to unsuccessful trading decisions. One of the benefits of candlestick wicks is that they have the ability to foreshadow impending price movements even before the formation of a candlestick pattern. Read on to find out more about candle wicks, what to make of them, and how to accurately interpret them.
What do candlestick wicks show you?
The wicks in a candlestick are basically price rejection points. They signal the unsuccessful price movements of an asset. This information can be used to identify several trading signals, right from support and resistance levels to future trend movements and reversals. Here’s a brief look at how you can use candle wicks to interpret trading signals.
Wicks show support levels
Let’s take up an example to better understand how wicks can help a trader identify support levels.
Take a moment to observe the part of the chart encircled in blue. The candles marked 1, 2, and 3, all have long lower wicks. These wicks are price rejection points, which signify the inability of the sellers to drive the price downward beyond certain levels. These levels act as the support levels beyond which the price of the asset has refused to fall. Also, since the price has always bounced back up in all the three instances after testing the support level, they can be construed as ideal entry points for a long position.
Wicks show resistance levels
Let’s take the help of the same chart to understand how wicks can help a trader identify resistance levels.
Take a moment to observe the part of the chart encircled in blue. The candles marked 1, 2, 3, and 4 all have upper wicks. As with the previous example, these wicks are also price rejection points that signify the inability of the buyers to drive the price upward beyond a certain point. This point acts as the resistance level beyond which the price of the asset has refused to rise. Also, since the price has always fallen back down in all the four instances after testing the resistance level, it can be construed as an ideal entry point for a short-sell trade.
Wicks show trend reversals
Candlestick bodies and the patterns generated by them are not the only tools that can indicate future trend reversals. Candle shadows are also very much capable of showing reversals. Let’s see how.
Long upper wicks during an uptrend
In both the instances, the candles marked 1 and 2 occur at the top of an uptrend. Also, both candles possess long upper wicks and short lower wicks. Long upper wicks signify the strength of the bears and weakness of bulls. When long upper wicks appear at the end of an uptrend as in this case, the trend sees a reversal.
Long lower wicks during a downtrend
In this instance, the marked candle occurs at the bottom of a downtrend. Also, the marked candle possesses a long lower wick and a short upper wick. Long lower wicks signify the strength of the bulls and the weakness of bears. When a long lower wick appears at the end of a downtrend as in this case, the trend sees a reversal.
Wicks show trend continuations
Most traders tend to exit their positions very early due to fear of trend reversals. Early exit means that they lose out on a lot of potential for further gains. Here’s where candlestick wicks can be of help. Candle wicks are versatile technical indicators that can show continuations of a trend as well, allowing traders to remain invested in their positions for a longer period of time.
Take a look at this chart here. The marked candle is exhibiting a long lower wick and a short upper wick. However, it appears during a downtrend. This sparks off a continuation in the downtrend, which you can see clearly in the given chart. In such a situation, the marked candle serves as the ideal entry point for a short-sell trade.
As you’ve seen by now, by simply identifying and interpreting candle shadows, you can gain a wealth of information with respect to the price movement of an asset. They’re very valuable and versatile technical analysis tools that should be in the repertoire of every trader. By mastering the art of reading such candle wicks, you could increase the chances of success tremendously.