Nick the Wick Candlestick Trading

Extremely long wicks give us a clue about potential market action and hidden levels of support/resistance. A long wick means the wick makes up at least 50% of the candles length (the distance from high to low of the candle). It is helpful if the length of the candle (from high to low) is larger than most candles on the chart.

A long wick indicates prices traded at that level, but not for very long. A long wick confluent with another level of support/Resistance provides a trading opportunity with a fairly tight stop. Therefore, our plan is to nick the wick by placing an entry order part way up on the wick in case prices try another retest of the highs. Entry orders will with stops and limits will be available on the Trading Station II software update this weekend.

Here is a daily chart of the EURCHF. The pair has been in an elongated downtrend for several months. After a significant move, it is common for prices to consolidate those losses. This is similar to exercising really hard, then feeling a need to rest for a while. Prices have traversed a great distance and need to digest the move. During these consolidation periods, you’ll find triangles and wedges and in this case, a slightly upward sloping channel.

Prices are near the top of this channel and therefore, may find resistance.

Moving to an hourly chart, we find a long wick left to the upside near 1.3180 resistance (orange areas). This wick means sellers are lurching overhead as prices traded up to those levels, but not for very long. Prices were immediately rejected and pushed down.

The Trading Opportunity

When an unusually long wick appears, look for prices to retest a portion of the wick. We can set an entry order about half way up the wick, then place a stop 15-25 pips above the high in this case. Look to take profit at least twice the distance as your stop.

In this example, we place an entry order (which was subsequently triggered) near 1.3175 which is half way up the upper wick of the orange candle on April 8. Since the high of the candle is near round figure resistance of 1.3200, place a stop just above that level near 1.3210. Look for twice that distance, or 80 pips as a profit target.

For more information on trading with candlestick formations and about Nick the Wick, visit DailyFX Plus for a recording of a live webinar conducted on April 8, 2011. ( CLICK HERE, log in with your live account username and password, then scroll down to the bottom of the page and look for Nick the Wick April 8.)

Jeremy Wagner contributes to the Instructor Trading Tips articles.