Most candlestick traders tend to focus on candlestick shadows rather than their candle bodies when performing technical analysis. Technical analysis also includes candle shadows, also called candle wicks. They are often misunderstood by traders and misinterpreted by them, which can lead to poor trading decisions. Candlestick wicks have one of the greatest advantages: they can foresee price movements before they form a candlestick pattern. Continue reading to learn more about candlewicks and what you can do with them.
Candlestick wicks are price rejection points. They indicate the failure to move an asset's price. This information can be used for identifying trading signals. It can include support and resistance levels, future trends and reversals. Let's take a look at the candle wicks and how they can be used to interpret trading signals.
Let's look at an example to see how wicks can be used by traders to identify support levels.
Take a moment and look at the blue-encircled portion of the chart. The candles marked 1, 2, 3 and 4 all have wicks that are longer than the others. These wicks signify that sellers are unable to lower the price below certain levels. These support levels are the levels above which the asset's price will not fall. These levels can also be used as entry points to long positions because the price has always bounced up in all three cases after passing the support level.
Let's use the same chart to see how wicks can be used by traders to identify resistance levels.
Take a moment and look at the blue-encircled portion of the chart. All candles marked 1, 3, and 4 have an upper wick. These wicks, like the previous example above, are price rejection points. They signify that buyers cannot drive the price higher than a certain level. This is the resistance level above which the asset's price will not rise. It can also be considered an ideal entry point to a short-selling trade because the price has fallen in each of the four cases after passing the resistance level.
Future trend reversals can also be indicated by candlestick bodies and their patterns. Reversals can also be shown by candle shadows. Let's find out how.
Both the candles marked 1 & 2 are at the top end of an uptrend in both instances. Both candles have long upper wicks, and shorter lower wicks. Longer upper wicks indicate the strength of the bulls and the weakness of the bears. If long upper wicks are seen at the end of an upward trend, as in this instance, it is a sign that the trend is about to reverse.
The marked candle is at the bottom end of a downtrend in this example. The marked candle has a long lower and a shorter upper wick. A long lower wick signifies the strength of bulls and a short upper wick the weakness of bears. If a long, lower wick appears at a bottom of a downtrend like in this example, it is a sign that the trend is about to reverse.
Fear of trend reversals is the reason most traders will exit their positions early. They lose out on many opportunities for future gains if they exit too early. Candlestick wicks are a great way to help. Candlewicks can be used as technical indicators to show continuations of trends, which allows traders to stay invested for longer periods of time.
This chart is available here. The marked candle has a long lower and a shorter upper wick. It appears in a downtrend. As you can see, this triggers a continuation of the downtrend. The marked candle is the perfect entry point for short-selling in such an instance.
You can easily identify and interpret candle shadows to gain valuable information about the price movement of assets. These are extremely valuable technical analysis tools that every trader should have. You can increase your chances of success by learning how to read these candle wicks.