Candle Wick
tl;dr
The candle wick (or shadow) in a candlestick chart represents the high and low prices during a specific time period. Long wicks can signal potential price reversals and help identify areas of support and resistance. Traders often use candle wicks in combination with other candlesticks and indicators to predict price movements and manage risk.
Definition.
The thin line above or below a candlestick that shows the highest and lowest price points reached during a trading period.
Real-World Example.
In candlestick charts, which are widely used in technical analysis for trading stocks, forex, and other assets, the candle wick (also known as the shadow) refers to the thin lines above and below the candlestick body. These wicks represent the price range within a specific time period. They show how high and low the price moved during that period, but not the opening and closing prices.
For example, let’s say you’re looking at a daily candlestick for a stock. If the stock opened at $50, rose to $55 during the day, and closed at $52, the candle body would span from $50 to $52. The upper wick would extend from $52 to $55, showing the highest price reached during that day. The lower wick could extend below $50, showing the lowest price reached before the price bounced back up to close at $52.
How to Use Candle Wicks in trading.
- Identify Reversal Signals: The length of the candle wicks can be a sign of potential price reversals. If you see long wicks, it may indicate that the market tested higher or lower levels but failed to maintain those prices.
- Long Upper Wick: A long upper wick suggests that the price moved high during the period, but the sellers took control, pushing the price back down. This could signal that the market is losing bullish momentum and may reverse.
- Long Lower Wick: A long lower wick suggests that the price moved low during the period, but buyers stepped in and pushed the price back up. This may signal that the market is losing bearish momentum and could reverse.
- Support and Resistance Levels: Wicks can also help identify areas of support and resistance. If a candlestick has a long lower wick and the price does not drop below that level, it could indicate strong support at that price point. Conversely, a long upper wick that does not exceed a certain price could suggest resistance at that level.
- Candlestick Patterns: When combined with other candlesticks, candle wicks can form various patterns that are used to predict future price movements. Some examples include:
- Hammer: A candlestick with a small body and a long lower wick. A hammer at the bottom of a downtrend suggests a potential reversal to the upside.
- Inverted Hammer: A candlestick with a small body and a long upper wick. This can indicate a reversal at the top of an uptrend.
- Doji: A candlestick with a very small body and long wicks on both sides, indicating indecision in the market.
- Volume Confirmation: A long wick with high volume can provide a stronger signal for a price reversal than a long wick with low volume. Volume helps confirm the strength of the price action, whether it is a bullish or bearish reversal.
- Intraday Trading: For traders who are looking at shorter time frames (like hourly or 15-minute charts), candle wicks can provide quick insight into price rejection at specific levels. A long wick on an intraday chart often suggests that price is being rejected at a certain price point, and traders might look for opportunities to trade the reversal.
