Hello friends and welcome to this podcast by Angel Broking.
Candlestick bodies are very popularly studied, and traders often analyse various patterns formed by them. But can you understand markets with candlestick wicks, and more importantly, can this knowledge help you place better trades in the market at the right time? That’s exactly what we will talk about in this podcast. So are you ready my friends?
Let’s start by telling you about an interesting conversation that Charvi and Alok were having at dinner yesterday. Charvi and Alok are doing an MBA from one of the top B-schools of India, and during this remote study spell, they decided to start investing in their free time at home. Having learned candlestick charts and patterns, they were following the charts of a company in which their friend Yash got placed.
They saw the prices climbing higher and higher, with almost no downtrend in sight. However, what Charvi found peculiar was that yesterday the stock touched it’s highest, but closed well below the peak. She was confused, but Alok was confident about further gains.
Are you with me friends? So what do you think? Will the prices go higher, or are they about to take a strong downturn?
If you don’t have the answer, we bet you will after the next two minutes. So let’s begin talking about the long and short lines that appear above candlestick bodies, which are also called wicks, or shadows.
Candlestick wicks are usually, very versatile technical indicators, that can foreshadow future price movements of a security.
What’s more, to the observant mind, candlestick wicks can also show you where the support and resistance levels are. Let’s start by understanding the latter - how to spot resistance and support levels with wicks.
Friends, when you look at a particular section of a candlestick chart, you can often spot long or short wicks that touch almost the same level during downtrends and uptrends. Let’s imagine a scenario where you spot three peaks on a candlestick chart. Now, if you can draw a horizontal line connecting the top points of candlestick wicks, then this line is the resistance level you are looking for.
Now, before we talk about why, let’s quickly take note of the fact that support levels can be understood in a similar manner - look for three or more lower wicks touching the same levels at the troughs. This will show you the support levels.
Now before we move on to the next cool thing, check out why this works. When a candlestick has a long upper wick, it means that the price points to which the security moved to were rejected by the markets. That’s why, it consolidated at a lower point. Now, this also means that a candlestick with a very long upper wick at the end of an uptrend means that a trend reversal is likely. This is because the bears are taking over the market.
Why? It’s because the higher price points of the security were rejected and the bears drove it to a lower point, where it finally consolidated. Cool, right?
Now you can also understand the puzzle that Charvi and Alok were dealing with. While Alok thinks that the long upper wick signals a positive future, Charvi realised that these upper prices were rejected. And lo and behold - the prices began to plummet the next morning.
Now, another cool thing you can infer from wicks is continuation of trends. Oh, did we miss the bullish trend reversal? Don’t worry, it’s the symmetrical opposite of the situation we just talked about - an abnormally long lower wick at the end of a downtrend shows that bulls are regaining control, and an uptrend might follow.
Consider a situation where a small candle with long lower wick and a small upper wick appears at the end of a downtrend. The crucial part about this case is that the lower wick has surpassed the previous support levels. In such a scenario, the long lower wick that broke a previously established support level can trigger a selling sentiment in the market, driving the prices further lower. This is an example of trend continuation. Simple isn’t it?
Now, once you understand the markets with precision, placing trades becomes real easy. Let’s see how.
If you can identify and establish the support levels of a security, you can easily create a long position with great efficiency - this is because the support levels will show you great entry points rather than mediocre entry points resulting in average returns.
Second point - by spotting the trend reversals or their possibility in advance, you can prevent disastrous losses. Imagine what would have happened if Alok invested in the security he and Charvi were spotting - he would have lost a good sum of money. That’s a novice mistake you don’t want to make!
And lastly, trend continuation is as important to understand. A lot of traders exit their trades early on, when they spot the possibility of reversals. Imagine that you failed to infer a downtrend continuation and exited your short position early on. Nope, don’t cut your short trades short. Identify trend continuations right with candlestick wicks, and you can maximize the results of your short and long positions.
Cool isn’t it? Friends, when you use charts for forecasting, always make use of other technical indicators in conjunction to strengthen you analysis. That’s all we had from today’s podcast by Angel Broking. Visit our website www.angelbroking.com, if you are still curious about how to make use of technical indicators in trading.
Until then, goodbye from Angel Broking. Stay safe, and happy investing!