How To Recognize and Trade on Long Wick Candlesticks?
Key Questions Answered
What Is a Long Wick Candle?
Traders regard the long wick candlestick pattern as a reversal signal which tends to resolve in the opposite direction of the current prevailing trend. It is one of the most iconic candlestick types, receiving its name due to its long wick attached to the candle body, as shown in the figure below. The green color of the candle’s body means that the closing price is more than the opening price. The red candle signifies the opposite where the opening price is more than the closing price. However, as a reversal signal, the color of the candle does not hold any significance. Instead, the candle’s location plays a significant role in determining whether the candlestick represents a potential bullish or bearish reversal.
The long wick candlestick pattern.
A potential bearish reversal signal has the candle body on the top and is found at the end of a bullish trend. This type of long wick candle is characterized by having a small (or non-existent) upper shadow (wick), where the candle’s highest price is close to or almost equivalent to the opening or closing price. Another notable characteristic is the long bottom shadow (wick), which means that the candle’s lowest price is far from its opening or closing price. In contrast, a potential bullish reversal signal has the candle body at the bottom and is found at the end of a bearish trend. This type of long wick candle is characterized by having a small (or non-existent) bottom shadow (wick) and a long upper shadow (wick).
What If the A Candlestick Has Two Long Wicks?
A Spinning Top
Some candlesticks have both very long upper and bottom shadows, as shown in the figure below. However, this candlestick is not regarded as long wick candlesticks. Instead, this candlestick pattern is called the “spinning top.” Generally, the candle body is small. The lengths of the upper and bottom shadows are also typically not equal, but there are scenarios where it can be difficult to ascertain the length difference.
The spinning top candlestick pattern.
The appearance of a spinning top signifies indecision from buyers and sellers as the long upper and bottom shadows indicate an absence of meaningful price change. The spinning top hints that the market trend will change by either reversing in direction or moving into a sideways trend. If the spinning top is a reversal signal, a green spinning top will signify a potential bullish reversal, while a red spinning top would indicate a potential bearish signal.
How To Recognize the Long Wick Candlestick?
Here are some examples showing the bullish and bearish long wick candlestick patterns that readers can use as a reference. The long wick candlestick patterns are very easy to spot due to their long candle wicks. However, readers should take note that the appearance of a long wick candlestick is not a guarantee that there will be a reversal.
Bullish Long Wick Candlestick
From the figure below, a long wick candlestick is located after a downtrend where the price fell from around $37,000 to about $29,500. The appearance of a long wick candlestick here is a potential bullish reversal signal, meaning that the asset is forming a bottom, which may be followed by a price increase. The long wick below the candle body signifies that sellers tried to push the price down significantly, but the buyers managed to push the price back up. The buyers did so by showing considerable buying strength, which will carry forward and lead to a price increase. In this example, the asset’s price did increase after the appearance of the long wick candlestick and rose to around $33,500.
Bullish long wick candlestick identified from a Bitcoin (BTC) price chart from Jan 19 to Jan 24, 2021, 1h time frame (Source: TradingView)
Bearish Long Wick Candlestick
From the figure below, a long wick candlestick is located after an uptrend where the price rose from around $31,700 to about $32,900. The appearance of a long wick candlestick here is a potential bearish reversal signal that means that the asset is forming a top, which may be followed by a price drop. The long wick above the candle body signifies that buyers tried to overpower the sellers but failed. The sellers managed to drive the price downwards, and their momentum will carry forward into a price decrease. In this example, the asset’s price did decrease after the appearance of the long wick candlestick and fell to around $31,100.
Bearish long wick candlestick identified from a Bitcoin (BTC) price chart from July 13 to July 16, 2021, 1h time frame (Source: TradingView)
How To Trade on a Long Wick Candlestick?
Once traders can regularly spot the long candlestick patterns, they should consider how to enter or exit the market and place their Stop Loss or Take Profit orders. As the crypto market is volatile, the Stop Loss or Take Profit order should not be too close to the entry price, or else it will trigger too quickly.
In long wick candlestick trading, the location of the Stop Loss order is typically placed near the closing price of the candle. The rules for the placement of Take Profit orders are slightly more complex. The location of Take Profit orders for the bullish or bearish long wick candlestick are different and depend on the resistance and support levels. The details about the resistance and support levels are as follows:
- The resistance level is the level where an uptrend pauses temporarily due to a concentration of supply from sellers. It is also known as the price ceiling. Traders should place their Take Profit orders around the resistance level when trading bullish long wick candle sticks.
- The support level is a level where a downtrend pauses temporarily due to a concentration of demand from buyers. It is also known as the price floor. Traders should place their Take Profit orders around the support level when trading bearish long wick candle sticks.
When is the best time to trade on a long wick candle?
Traders should keep in mind not to immediately enter a trader after spotting the long wick candlesticks. Instead, traders should wait for further confirmation from technical indicators, oscillators, or other trading tools to confirm the trend reversal to avoid unnecessary losses. Traders can also change the time frame of the chart depending on their trading strategy. Day traders can choose shorter time frames of 5 minutes or 15 minutes to quickly trade the price changes. For most traders, longer time frames of at least 1 hour are enough. Novice traders are recommended to practice their trading techniques on simulation trading platforms, followed by trading small volumes to get used to long wick candle trading before moving on to trading large volumes on cryptocurrency exchanges.
Trading on a Bullish Long Wick Candlestick
The figure below is an example of how to enter a market after the appearance of a bullish long wick candlestick. The corresponding steps are as follows:
- The trader identifies a bullish long wick candle at the end of a bearish trend. The candle is characterized by its long bottom shadow.
- The trader places an order around the closing price of the identified long wick candlestick at around $29,500 and prepares to go long.
- To limit losses, the trader places a Stop Loss order at the low end of the long wick candlestick. In this case, the Stop Loss order is placed at around $28,900.
- The trader places a Take Profit order. Since this downtrend is reversing to a bullish trend, traders should place the Take Profit order around the resistance level. In this scenario, the resistance level is located at around $33,800.
The Take Profit, Stop Loss, and entry point for a bullish long wick candle identified from a Bitcoin price chart from Jan 19 to Jan 24, 2021, 1h time frame (Source: TradingView)
Trading on a Bearish Long Wick Candlestick
The figure below is an example of how to exit a market after the appearance of a bearish long wick candlestick. The corresponding steps are as follows:
- The trader identifies a bearish long wick candle at the end of a bearish trend. The candle is characterized by its long upper shadow.
- The trader places an order around the closing price of the identified long wick candlestick at around $32,950 and prepares to go short.
- To limit losses, the trader places a Stop Loss order at the high end of the long wick candlestick. In this case, the Stop Loss order is placed at around $33,180.
- The trader places a Take Profit order. Since this uptrend is reversing to a bearish trend, traders should place the Take Profit order around the support level. In this scenario, the support level is located at around $31,350.
The Take Profit, Stop Loss, and entry point for a bearish long wick candle identified from a Bitcoin price chart from July 13 to July 16, 2021, 1h time frame (Source: TradingView)
Conclusion
Trading on long wick candlesticks can be very profitable if traders can reliably identify them by adhering to the identification rules. A bullish long wick candle is usually at the end of a downtrend, while a bearish long wick candle is typically at the end of an uptrend. However, like all trading strategies, long wick candlestick trading involves a certain degree of risk. A long wick candle is only a signal that indicates there is a possibility of a trend reversal and does not guarantee that the reversal will happen. Thus, traders are advised to combine the pattern with other available trading tools and practice with such tools before utilizing them in trades.