Wicks are an interesting phenomenon in price candles formations and are a part of every candle, and an important variable in determining the Cut Loss and Take Profit points. Wicks can be formed on the top, bottom or both sides of a candle, and they represent the highs and lows of that candle during that period of time.
What is important to remember after reading this article is that the
wicks are basically ‘rejection’ areas where the market simply rejected
the prices of the wick. It is important to note that we are talking
about the “Close” of the candle and the wicks it forms after candle
closes. it is the final and permanent shape of the candle.
When we see a long wick, it clearly confirms that the market (or
participants) rejected the price move compression during that period of
time, therefore, prices weren’t accepted. On the other hand, if prices
were accepted, then the price would remain there for a decent amount of
time and most probable close somewhere around there. And since the
relationship between “when” and “what is considered a must in business,
but its importance rises in this context, which is the market’s
rejection to the price value during that specific period of time.
If we are talking about 5min charts, then the wick formed is for only
relevant to 5 minutes charts, which are non-essential or of real
impact. However, when we start to look at 4 hour or daily charts, then
they are of great significance.
If you think about it, day traders are only witnessing two or three 4
hour candles during a day. So in order to have a long wick on a 4 hour
chart, then forces behind the price move must be very strong and
important. And since day traders will rarely take notice of this move
because it take a long period of time to form – hence they will usually
end up trading against the price action trend. This basically supports
the conflict of interest theory between the retail investors and
FXLORDS recommends using the 4 hour chart when working with strategy, or when a long wick forms on the daily chart.
Take a look at the example below, notice how every time this pair
reversed, it did so with a very long wick and on the same price level.
This was telling us that the market simply did not accept prices at
these levels, simply because the move didn’t coincide with the time
frame (No participants), Therefore, sellers aggressively entered the
market quickly causing the pair to drop fast which the confirmation of
If a long wick is formed on a daily chart, day traders across all
time zones should take note of it and really be confident about their
trade going against the wick, especially given enough conviction via
technical or fundamental analysis. The main reason is that the market
has rejected that price level that entire day. With that being said,
there’s also ways to incorporate this approach to target range trading
or breakouts, in both cases, these guidelines serve as “Risk Management”
principles if applied properly.
Since the wick represent the high and low price of a candle, and is
an area of “rejection”, then the probability of trading inside the wick
is pretty low, which means that trading within daily candles’ region is
going to be less likely, and so your Stop Loss order.
It should be noted when analyzing price action that the market will
usually make a second attempt on the previous rejection level (wick’s
tail). Notice in the example below how these levels served as support
levels. For that reason, when trading wicks, we should account for
another test to the previous wick’s tail; thus, using the tail will
offer a better risk/reward opportunity.