Long Wick Candles - Meaning & How to Trade with Long Wick Candles | Espresso

What is Long Wick Candlestick Trading

Investing in stock markets involves a fair bit of risks. It requires a lot of analysis, planning, and careful execution. Different investors use different methods and techniques to predict the movement of shares and invest accordingly.

Published on 20 February 2023

One such method is reading candlestick charts that enable the investors to interpret short-term movements in the prices of shares.

Each candlestick chart has three parts – body, wick, and colour. The wick or shadow in candlestick trading indicates the low and high points during the intraday movement of share prices. During wick trading, the size of the wick candle matters a lot.

In this article, we’ve explained the long wick candlestick trading strategy in detail. Continue reading.

Long Wick Candlestick Trading

When the wick of a candlestick is short, it indicates that the trading was mostly done between the opening and closing prices of the share during that trading session. However, if the wick is long, it signifies that the price movements have crossed the opening and closing prices by good margins.

Usually, a long wick candle signals that the share can move in the opposite direction of the prevailing trend. For example, if the share price goes up, it can go down in the coming period and vice versa.

How to Recognise a Long Wick Candle?

While reading a candlestick chart, look for a candle with a long wick either above or below the body. The wick should be significantly longer than the ones in the surrounding candles.

A long upper wick candle (the one in which the long wick is above the candle body) forms when a share moves too strongly towards its high point but closes at a weak price. This happens when buyers try to dominate a major part of a trading session, but the sellers eventually bring down the price of the share.

On the other hand, a long lower wick candle (the one in which the long wick is below the candle body) is indicative of a trading session where the sellers were dominating for the most part, but eventually, buyers managed to push up the share price.

How to Trade a Long Wick Candle?

You can use the long wick candles to determine short-term trade prospects. A long wick candle usually indicates the reversal of the current movement pattern of the share. Hence, the first thing you have to do when you see a long wick candle is to identify the prevailing trend.

If you notice a long upper wick candle during an uptrend, there is a strong possibility that the price of the share will move down in the market direction. Similarly, if you notice a long lower wick candle during a downtrend, it may indicate a bullish reversal signal, and the share price may move market direction.
Also Read: What is Bear Market & Bull Market?

However, it’s prudent to confirm or validate this movement with the resistance or support level of the share. The resistance level is the point at which the share price may fall after an uptrend, whereas the support level is the point at which the share price may bounce after a downtrend.

What Does a Long Wick Indicate in Forex?

A long wick candle similar to gravestone Doji, shooting stars, and hammers belong to the category of reversal candlesticks. When prices reach higher highs or higher lows during a continuous period, it indicates an uptrend. Downtrends are the exact opposite of it, which means that the prices reach lower highs and lower lows.

An uptrend can be spotted by looking at a series of higher lows and higher highs in succession. If you see a horizontally flipped image of an upward trend, it will signify a downward trend. An uptrend comes to an end when the current price goes below the last low. During downtrend reversals, prices go above the last high.

Traders rely upon trends and trend breaks associated with sophisticated algorithms. They are useful for understanding when you should open or close positions in candlestick trading.

A short candlestick wick suggests a strong trend because the Forex pair has moved close to the extreme for that particular period. On the contrary, a wick with a short bottom reinstates the downward trend signal from descending candles.

The reverse is true when it's a wick with a short top, indicating an uptrend among ascending candles. Alternatively, long wicks reveal that the currency pair did not settle near the extremes. It proves that there's a lack of trend.

How Can a Trader Use Long Wicks in Their Trading

The first step while using a long wick candlestick is spotting the trend. When the trend is down, spotting a candle or several candles with a long wick on the top indicates that there's a high potential for the price to move down in the market direction.

  • In case of a downward trend, the pair might retrace or move against the trend and stall at a level of resistance or a Fibonacci level. In such a situation, traders will have to spot long wicks at the top of the candles appearing along the resistance line for two specific reasons:
  • The long wicks suggest that the pair can trade to the downside back in the direction of the trend.
  • The top of the extended wick offers a trader to place their stop. The objective for the stop placement is that the buyers pushed the price to the top of the wick but could not drag it beyond that point. Therefore, placing the stop right above that wick is the level that has a lower chance of getting hit.

When it comes to candlestick trading, traders often get confused regarding which time frame of the chart this strategy is applicable for. In the case of day traders, it might be applicable for 10-minute time frame charts. On the other hand, swing traders can look at intraday charts of 2-hour or 4-hour.

Traders should try to spot long wicks developing at levels of support or resistance. Particularly, when they signal a movement in the direction of the daily trend, it becomes beneficial for traders.

What if Both Wicks are Longer?

Usually, the upper and lower wicks of a candle aren’t equal. However, sometimes neither of the wicks may be longer. In such a case, the candlestick is said to be a spinning top. This indicates a tough fight between the bulls and the bears, resulting in a stalemate. Therefore, it’s advisable to avoid trading if you notice such a candlestick.
Also Read: What is Doji Candlestick Pattern?

To Sum it Up

Candlestick trading is a useful strategy adopted by many traders to predict short-term price movements of shares. A Long wick candle generally acts as a reversal signal, indicating that the share price may move in the opposite direction of the prevailing trend.

Depending on whether a long wick is formed above or below the candle’s body, the share may witness a potential bullish or bearish reversal. However, it’s prudent to validate this reversal with the resistance and support levels of the share.
Also Read: Trading Charts

Chandresh Khona
Team Espresso

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