How to Profitably Trade Candlestick Wicks? Strategy & Examples

Trading concepts

Trading Wicks

Trading wicks is a trading concept that all traders must know and understand. However, it is among the most misunderstood technical analysis concepts despite being a key concept. In fact, candlestick wicks are a very important part of your technical analysis. You can also gauge market sentiment about a particular instrument using wicks.

Given the importance of trading wicks for profitable trading, we are going to help you understand this crucial concept. In this article, you’ll learn what are candlestick wicks, how to identify them, and how to use them in your strategy. So, let’s begin right away!

What are candlestick wicks?

A candlestick wick or a shadow is a part of a candlestick on your chart. It refers to a line on a candlestick and indicates the price fluctuation relative to the opening and closing price. In simplest words, wicks or shadows help traders know the highest and the lowest price of a security during a particular time period. 

Explanation of candlestick wicks

Understanding candlestick wicks is a prerequisite to successfully trading wicks. Therefore, it is important to know all about wicks before moving on to the trading wicks concept. 

You can locate wicks or shadows either above the opening price or below the closing price. These are thin parts and resemble a line. They represent the price action of a given time period as prices move beyond their highs and lows. Additionally, the length of the wicks is also important as it serves as a measure to gauge the market sentiment of a financial instrument. 

Moreover, a long wick above the opening price illustrates increased selling pressure that results in decreasing price. Conversely, a long wick below the closing price indicates increased buying pressure that pushes prices above. Long wicks also suggest that the price will reverse soon. Whereas, a candlestick with little or no wicks indicates a strong trend that is likely to continue. 

Trading wicks – the importance of candlestick wicks

As you know now, trading wicks are a crucial trading concept. You can maximize the odds of profitable trading by understanding this concept. Why so? Let’s explain. 

There are two types of analysis – fundamental and technical. The performance of a company provides the foundations for fundamental analysis. Metrics like revenue and earnings are important in this type of analysis. Whereas, the technical analysis relies on price action to find clues about the price movement of a security. And for price action, candlesticks and candlestick patterns are highly useful. That said, candlestick wicks are also important as they are key parts of candlesticks and convey important information. 

Trading wicks strategy

Now, it is time to turn our attention to the main question – how to trade wicks for profitable trading. 

Candlestick charts aren’t a modern tool to analyze the price action of financial instruments. Instead, it dates back decades ago. There are numerous candlestick patterns that traders can capitalize on for profitable trading. Trading wicks means a trading strategy that involves making trading decisions on the basis of what you observe on your charts. Moreover, trading wicks is a profitable trading strategy because wicks and the length of candlesticks are sources of narrative information. Simply put, you can analyze wicks while using the trading wicks strategy to predict future price movements. 

There are numerous trading wicks strategies that you can learn and employ in your trading. However, our goal is to share with you a few simple but most reliable strategies. Here we go!

1. Trading wicks strategy # 1

The first trading wicks strategy is to trade long wicks. It is a simple but highly useful trading strategy. 

The first step is to identify a candlestick with a long wick either above or below the main body. A long wick is easy to identify as it should be significantly longer than the surrounding candlestick wicks. It is also important to understand why long wicks form? A long upper wick forms because of high selling pressure. It suggests that the buyers controlled the game for a significant part of the trading period. However, sellers finally took charge and pushed prices down. Conversely, a long lower wick forms because of high buying pressure. It suggests that the sellers controlled the market for a significant part of the trading period. However, buyers finally took charge and pushed prices high.

Now, how to trade these long wicks? It is simple. If a long wick forms above, it illustrates that the market rejected the price of the asset. Thus, a strong downtrend may ensue after a candlestick with a long upper wick. As it indicates a reversal of an uptrend, you can go short to make profits. Contrarily, if a candlestick with long lower wick forms at the bottom, it is a sign of reversal of a downtrend. This lower long wick indicates high buying pressure. Thus, you can go long to make a profit as it is a trend reversal sign.

2. Trading wicks strategy # 2

It is also important to note that a wick isn’t always a rejection signal as it may also lead to a breakout. How so? Let’s try to understand it. For example, you must have seen a candlestick with a wick trying to break the support at the previous lows. Generally, such a candlestick indicates that selling pressure isn’t strong enough to make the price close below the support level. 

However, in some cases, it doesn’t happen. Instead, the presence of high numbers of sellers pushes prices low during the ranging zone. That forecasts a shift in the balance of power between buyers and sellers. Now, it may happen that the price may break the support shortly afterward. In such cases, traders who don’t know that wicks may also foreshadow a breakout get confused and get out of their positions early. Conversely, traders who know this fact evaluate the situation differently. So, it is important to keep both scenarios in mind when trading wicks. 

Trading wicks – some useful tips

Firstly, trading wicks seems simple but it isn’t in reality. Wicks may cause confusion and lead to wrong decision-making. Therefore, it is always a good idea to wait for confirmation. You can validate wicks with levels of support or resistance. 

Secondly, there is another scenario that may also come into the picture. Although both upper and lower wicks aren’t usually equal, sometimes it may happen. So, what should you do when both wicks are almost equal in size? A candlestick with an almost equal upper and lower shadow is known as a spinning top or a spinning bottom. Such candlesticks indicate the balance between bears and bulls. The stalemate is caused by a tough battle between buyers and sellers. This is a scenario that may favor either bulls or bears. Therefore, it is prudent not to enter a trade in such situations. 

The wrap-up

Candlesticks are among the most important tools to analyze price action. A candlestick consists of a main body and wicks. Trading wicks is a trading strategy that involves making trading decisions based on candlestick wicks. Although trading wicks seems simple, it isn’t that simple. Therefore, you need to thoroughly understand it before commencing trading wicks. 

There are several strategies for trading wicks. However, there are some pretty simple strategies as well. For example, trading long wicks that indicate a reversal. Moreover, long wicks don’t necessarily mean a reversal in every case. They may foreshadow a breakout. Therefore, it is important to stay vigilant and wait for confirmation. 

Russell Crane

Russell Crane

Russell is an Algorithmic & Technical Analyst Trader @ PatternsWizard.
His passion is to share his knowledge about TA, patterns & more. Why hope for your trading to work when you can precisely know the performance stat of every pattern?

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