I have a colleague whom I've worked with at several jobs. Everyone has their quirks, especially when it comes to resigning from a job but hers is by far the strangest. She always wears a very long, floor-trailing skirt whenever she needs courage to go in and tell her boss that she plans to quit.
She reminds me of a long wick candle on her resignation day…. Her long skirt brings to mind the long wick of the candle, while her resigning, reminds me of the stock price reversal that the long wick candle symbolizes.
As you might have gathered from my little story, the long wick candle is a reversal pattern.
A little background for those of you who might still be confused. A candle or a candlestick is used to denote the key details of a stock price on a given day. The candle may also be used to signify a minute or an hour or just about any period, but for convenience sake let's refer to a single candle as one day. The rectangular or cylindrical portion of the candlestick represents the opening and closing prices of the day while the upper and lower wicks denote the day's stock price high and its stock price low, respectively. The wicks are the lines emerging from the body of the candle - they are sometimes also referred to as legs.
A long lower wick indicates that prices plummeted drastically during the day, although they recovered by the end of the day. This means that the bears or the sellers drove the price down but the bulls or the buyers demonstrated more strength resulting in the price being pushed back up. Traders usually anticipate that this strength will be seen in candles or days to come as well. The common consensus in this case is to predict a price increase.
A long upper wick indicates that stock prices increased dramatically during the day but rationalized by the end of the day. This means that the buyers or the bulls, pushed the price up dramatically during the course of the trading day, but then under pressure from the bulls, the price slid back down obediently. Most traders predict that this show of strength will continue resulting in prices continuing to drop further in the following days.
So how does one identify a long wick candle on a stock graph? What are you looking for exactly?
Number 1: A long wick obviously, either above or below the main body of the candlestick. You're looking for something that resembles a sword or a pin. The wick should be dramatically and disproportionately large as compared to the other wicks. Number 2: The size of the body of the candle is no consideration.
Number 3: You're looking for a long upper wick during an upswing and you're looking for a long lower wick during a downtrend.
You will typically find these candles at support and resistance levels, at the tail end of any trend or at Fibonacci retraces.
The long wick candle is incredibly easy to spot but according to traders it is also fairly foolproof. The word fairly is key here because it is indeed only fairly foolproof. No prediction method can offer you a fail safe, fool proof or sure shot on the stock market.
That said, many traders like to trade using the long wick candle.
Here are some top considerations if you too want to trade the long wick candle.
Predictions made using the long wick candle, like most candlestick patterns are best confirmed and reaffirmed by technical indicators and other candlestick patterns.
Some traders recommend using the long week candle for 60 minute, four-hour or weekly technical charts and not for 1 minute or 5 minute charts. Basically the idea is that this type of pattern works better on longer term charts versus the very short view charts.
Despite how certain things might appear with the appearance of the long wick candle on a stock price chart, it is always advisable to wait for a price confirmation in the direction of the prediction before actually trading.
So what do traders do when they witness the appearance of a long wick candle?
When a long wick candle with a long upper wick appears, traders are anticipating a price decrease. In order from having to sell at a very low rate, they may sell right away. Short sellers, who borrow stock from a stock broker and sell it at a decent rate only to buy it back at a much lower rate, might also enter the game here.
When a long wick candle with a long lower wick appears, traders are anticipating a price increase. They will buy stock at this stage and wait for the price to reach a point that is reasonably higher than what they bought at, at which point they will sell the stock.
Well friends, there you have it. The basics and workings of the long wick candle. It sure sounds exciting, doesn't it? Don't get ahead of yourself however. Always trade with small sums capital, particularly if you are a beginner trader. And without fail, ensure that you are trading with capital that you can risk losing without having to significantly alter your standard of living - or in other words, consider your risk appetite. Lastly, remember to set a profit target and stop loss before you enter the game.
And for more knowledge on markets and trading strategies, don’t forget to check out our other podcasts. Until then, goodbye from Angel Broking and happy investing!