Long wick candles are a common occurrence in the forex market. Understanding the significance behind these candles is invaluable for any trader, as it provides insight into market dynamics during a specific period.
While trading candle wicks is often overlooked due to its simplicity, mastering this concept can be a valuable addition to a trader’s skill set. This article will cover:
- What are long wick candles?
- How to identify a long wick candle on forex charts
- What does a long wick tell us in forex?
What are Long Wick Candles?
Long wick candles are a type of candlestick that feature a long wick extending from the candle body. The candle body can be either bullish (positive) or bearish (negative), making the long wick applicable to any type of candlestick.
The length of the candle wick represents the high and low of price movement within a designated time period. Understanding and trading candlestick wicks can provide forex traders with key tradeable opportunities.
How to Identify a Long Wick Candle on Forex Charts
1. Locate Long Wicks: Identify candles with wicks that extend significantly longer than the surrounding wicks, either above or below the candle body.
2. Identify Key Price Levels: Use price action to pinpoint key levels that align with the long wick, indicating potential areas of support or resistance.
3. Detect Trade Opportunities: Utilize the information provided by long wicks and key levels to spot potential trade setups.
What Does a Long Wick Indicate in Forex?
A long wick candle, similar to patterns like shooting stars, gravestone Doji, and hammers, belongs to a “family” of reversal candlesticks. Let’s explore an example:
NZD/JPY Long Wick Candles
The chart below displays NZD/JPY on a weekly time frame, with blue highlights indicating long candle wicks that precede reversals in price movement. When the longer wick is below the candle body, the price tends to move upward.
Conversely, when the longer wick is above the candle body, the price tends to move downward. These extended wicks, which stand out compared to other wicks on the chart, provide valuable insights for traders.
A long wick extending below a candle suggests that sellers were able to push the price down significantly. However, bulls managed to drive the price back up, indicating strong buyer presence. Since the bulls overpowered the bearish selling pressure, there is potential for this strength to continue, leading to an upward price movement. The same principle applies for long wicks appearing above the candle, signaling potential downward movement.
What Does a Long Wick Indicate in Forex?
A long wick candle, similar to patterns like shooting stars, gravestone Doji, and hammers, is part of a “family” of reversal candlesticks. Let’s explore an example:
NZD/JPY Long Wick Candles
The chart below illustrates NZD/JPY on a weekly time frame, with long candle wicks highlighted in blue, indicating potential reversals in price movement. In simple terms, if the longer wick is below the candle body, the price tends to move upward.
Conversely, if the longer wick is above the candle body, the price tends to move downward. These extended wicks, which stand out relative to other wicks on the chart, provide valuable insights for traders.
A long wick extending below a candle signifies that sellers managed to push the price down significantly. However, bulls were able to drive the price back up, showing strong buyer presence. Since bulls overpowered the bearish selling pressure, there is potential for this strength to continue, leading to an upward price movement. The same principle applies for long wicks appearing above the candle—signaling potential downward movement.
How Can a Trader Use Long Wicks in Their Trading?
The first step in utilizing long wicks is to identify the trend. For example, in a downtrend, observing a candle (or several candles) with long wicks on the top suggests a stronger potential for the price to continue moving downward in line with the trend.
Continuing with the downtrend scenario, if the pair retraces (moves against the trend) and stalls at a level of resistance or a Fibonacci level, traders will look for long wicks at the tops of the candles forming along that resistance line for two key reasons:
1. Directional Signal: These long wicks indicate the potential for the pair to resume trading to the downside, back in the direction of the trend.
2. Stop-Loss Placement: The top of the extended wick offers a prudent level for placing a stop-loss order. The rationale is that while buyers pushed the price to the top of that wick, they couldn’t push it beyond that point. Hence, placing the stop just above that wick provides a level with a lower likelihood of being hit.
Time Frame Considerations
There is often confusion among traders regarding which time frame this strategy can be applied to. Day traders may look at 5- or 10-minute time frame charts, while swing traders might focus on other intraday charts like 2-hour or 4-hour charts.
| Advantages | Limitations |
|---|---|
| Appears frequently in all financial markets | Cannot be traded using the long wick candle in isolation |
| Long wicks are easy to identify | Require supporting evidence to trade such as key price levels or indicators |
