Understanding candlesticks is crucial for trading and long wick candles or rejection candles are even more crucial. Why so? Because long wick candles indicate a reversal of the current market trend. And understanding when the current market trend is going to end and reversal begins is a key skill in trading. It enables traders to know what to do with existing trades and helps them determine the best entry or exit points to ride the trend. So, rejection candles may help you make some serious money.
Long wick candles are important and that’s why we are going to help you know all about them. Our today’s post is going to help you understand what rejection candles are, how they are formed, and how to trade them.
What are long wick candles?
As you know, a candlestick consists of a body and a wick. Now, a candlestick with a small or an average size wick indicates trading activity around the opening and closing price. Contrarily, a long wick candle, as the name suggests, has a long wick as compared to a small body. So, it indicates that trading activity isn’t happening around opening and closing prices. Conversely, trading activity extends beyond the opening and closing price.
How does a long wick candle form?
To fully understand long wick candles, it is important to know how they are formed. Firstly, we try to understand the formation of a long upper wick candle. A long upper wick candle is formed by higher buying pressure and subsequent rejection. That means buyers take the price of an asset beyond the opening and closing price by taking control of the market for some time. However, they eventually lose to sellers’ counterattack and the price falls. When the price falls after making a high, it forms a long upper wick. A long upper wick candle indicates the market’s rejection of rising prices.
On the other hand, a long lower wick candle is formed by higher selling pressure and subsequent rejection. That means sellers take the price of an asset well below the opening and closing price by taking control of the market for some time. However, they eventually lose to buyers’ response and price begins to rise. When the price rises after making low, it forms a long lower wick. A long lower wick candle indicates the market’s rejection of falling prices.
In other words, long wick candles are formed because of supply and demand. When prices begin to rise, the demand begins to decline and the prices fall again. Conversely, when prices begin to fall, the demand increases, and prices begin to rise again. Moreover, long wick candles also indicate that the market rejects upward or downward movement. Therefore, long wick candles are also known as rejection candles.
How to spot and trade rejection candles?
It isn’t a tough task to spot a rejection candle as it has a long lower or upper wick. Whenever you see a candle with a wick significantly longer than the surrounding candles, it is a rejection candle. Moreover, it is also important to note that a rejection candle may form in any time frame. However, longer time frames give a stronger reversal signal.
Now, the important thing is how to trade a long wick candle. As we have already discussed that these candles are generally price reversal candles. The long upper wick candle predicts a strong downtrend. Whereas, a long lower wick candle forecasts a strong uptrend. In order to trade rejection candles, the first step is to recognize a trend.
If the ongoing trend in the market is an uptrend and a long wick candle appears at the top, it foretells a strong downtrend. Conversely, if the current trend is a downtrend and a rejection candle appears at the bottom half, the price may begin to rise. However, it is important to wait for confirmation. You may enter the trade after confirmation.
Moreover, what to do when multiple long wick candles appear? If this is the case, there are strong chances that the current trend will continue and there will not be a reversal.
What to do when a candle has long wicks on both ends?
When a candle has both a long upper wick and a long lower wick, there is no need to worry. Such candles do not fall under the long wick candle category. A candle that has long wicks on both ends is known as a spinning top. It is important to note that the size of the upper and lower wicks doesn’t matter just as the color of the candle doesn’t matter. Moreover, the size of upper and lower wicks may vary or they may remain almost the same. Whatever is the case, the spinning top remains a reversal pattern and the reversal chances are high after its formation.
Long wick candles/rejection candles – the wrap-up
Long wick candles or rejection candles are among the most important candlestick patterns. You need to know all about them for better decision-making in trading. Long wick candles are known as rejection candles because they are formed when the market rejects the upward or downward movement of prices. Moreover, rejection candles are reliable signals of a trend reversal. Therefore, you can use them to take full advantage of an upcoming reversal of trends in the market.