Hello friends, welcome to this podcast by Angel One.
Everyone studies candlestick bodies to study the real price action, but did you know that wicks are also very important technical indicators?
That’s correct, Wicks can help you understand the price action of a security at very crucial and thrilling points in the market. And in today’s podcast, that’s exactly what we will talk about!
So are you ready for it? Let’s start with this interesting exchange between Riya and Reena.
One day, Riya was bored after dinner and couldn’t fall asleep. Having taken an interest in trading in the recent past, she began researching the price movement of a tech company.
In the process, she was also judging her own objectivity, because she is very passionate about tech, and the recent heavy gains in the sector despite the lockdown got her even more curious.
So, she started looking at some candlestick charts, and when she spotted long and short wicks on candlesticks, she wondered: “Alright, candlesticks form patterns and they help us pick the right signals for placing trades and investigating. But what about these wicks? Don’t they tell us anything?”
She studied online, and in the process, discovered that these wicks actually represent very critical information about a security’s price action.
Before we tell you what she told Reena after understanding the use of wicks, let’s talk you through some cool stuff about wick trading.
Let’s begin. You must already know that bullish candles are white and bearish ones are black. Now, in bearish candle bodies, the close point is at the bottom, while the open is at the top.
And in bullish candles, it is the opposite.
Peak and bottom price points are represented by the wicks. Now, understanding and calculating the length of the wick is very important, and you’ll soon see why.
To calculate the length of the upper wick, all you need to do is to note the peak price for the period, and the open and close. Now, from the peak price, subtract the open or close price, whichever is closer to the peak. This gives you the length of the upper wick. For lower wicks, the process is similar - all you need to do is to subtract the open or close price from the bottom price point, depending on which one is closer to the bottom.
Simple, isn’t it?
Now, the process of calculating the body of the candlestick, you simply subtract the open price from the close, or reverse, depending on whether the candle is bullish or bearish.
That’s a lot of calculations.
Now that you made the effort to understand that, it’s time to reap the benefits!
By dividing the length of the wick by the size of the candle, you can infer very important information about the sentiment around the price of a security in the market.
Let’s see how, but before that, an important thing to know: Candlestick bodies and wicks are often measured in pips. These help you understand the price movement on the basis of change noted in the decimal points. So, if open and close are at 1.0750 and 1.0760 respectively, then the body of the candle is 10 pips.
Once you divide the wick length to candle length, you get a percentage or a ratio. In the market, this is often called percentage of the wick, or wick percentage. Consider that the wick is 30% of the size of the candle. Would the sentiment of the market be any different if the wick was 80% of the size of the candle?
Oh yes! And that is what we will understand next.
Now, if the percentage of the wick is less than 22.5%, then the bulls or bears are actually in control of the market, and the price action underlying the existing trend is significant. What you can take away from this, is that the trend is likely to continue.
Now, if the wick size is more than 22.5% of the candlestick body, that’s when you should start looking at other indicators to make an informed forecast.
While bears or bulls are likely still in control, a closer examination is often useful to make the right decision.
Moving further, if the wick is 33-67% of the real body, it means that there is an indecision about the security in the market. And lastly, check this out - if the wick is longer than 67% of the body, it means that the bulls or bears are losing control. THis is because excessively long wicks represent price rejection - the security moved to a peak price or to the bottom, but failed to consolidate. Depending on other factors, this can indicate a trend reversal.
Riya actually tracked a security that Reena was invested in. She spotted the possibility of reversal by spotting a long upper wick at the peak, and informed Reena that it might be time to exit. She did, and thanked Riya for the heads-up!
By studying wicks of candlesticks, you can actually peer through them to see what is actually taking place in the market. This is very helpful when the prices move beyond support or resistance, or even when breakouts happen. To learn how to spot support and resistance levels, check out our other podcast on how to trade with candlestick wicks.
Friends, that’s all from today’s podcast. We will be back soon, but in the meantime, don’t forget to visit www.angelone.in for quenching your thirst for knowledge about trading and markets.
Stay safe, and goodbye from Angel One!