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Long Wicks Have a Story to Tell

Long Wicks Have a Story to Tell

2011-06-29 22:24:00
Richard Krivo, Trading Instructor
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When we are looking at price action on a candlestick chart in our live webinars, long wicked candles can definitely provide some insight as to price movementon the pair.

Take a look at the 1 hour chart of the GBPJPY below for a visual…

Long_Wicks_Have_a_Story_to_Tell_body_chart_6_29_11.png, Long Wicks Have a Story to Tell

Note the rectangles that are highlighting some of the longer wicks on this chart. Also note that after a long wick makes an appearance, oftentimes price will move in the oppositedirection of the long wick for a time. In other words, if the longer wick was below the body of the candle, price has a tendency to move up. Conversely, if the longer wick is above the body of the candle, price has tendency to move down.

These extended wicks, those that are longer relative to other wicks on the chart, have a story to tell.

A long wick at the bottom of the candle signifies that sellers were able to push the price down significantly and that is what creates the long wick.

However, the seller’s numbers were not great enough to keep the price at that low level. The buyers were able to push price back up from that low level thereby showing strength. Since the buyers triumphed in that sense, there exists the potential that their strength will carry forward and given that strength the price may rise. (In the case of long wicks above the body of a candle, the opposite scenario would be true.)

So how can a trader use this in their trading?

As always, we must first take note of the daily trend. If the trend is down, seeing a candle (or several candles for that matter would even be better), with long wicks on the top, that points to a stronger potential for price to move down in the direction that the market has been taking the pair.

So, to continue with the downtrend example, if the pair retraces…that is, against the trend…and stalls at a level of resistance or a Fib level, I am going to be looking for long wicks at the tops of the candles forming along that resistance line for two reasons.

  1. Those long wicks indicate the potential for the pair to trade to the downside back in the direction of the Daily trend.
  2. The top of that extended wick provides a very prudent level for a trader to place their stop. The rationale for that stop placement being that buyers pushed price to the top of that wick but could not push it beyond that point. Hence, placing the stop just above that wick is a level that has a lower likelihood of getting hit.

Bottom Line: Taking note of long wicks forming at levels of support or resistance, especially when they signal movement in the direction of the daily trend, can create a beneficial “edge” for the trader.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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