5 factors to consider when long wick candlesticks form in the market

Long wick candlesticks are one of the most interesting types of candlesticks which can appear in the stock market. Such candles are given different names such as hammer, inverted hammer, shooting star, doji, etc. Regardless of their names, these candles provide us great insight into the behaviour of the market participants. These candlesticks should be on the watchlist of both traders as well as investors since they can provide some amazing opportunities to make money in the market if understood correctly. Before jumping into the different factors to consider when investing or trading long wick candlesticks, let’s understand the basics on long wick candlesticks. 


What is a long wick candlestick?

A long wick candlestick has a small body and a long wick. Unlike big body candles which have a big body and a small wick, long wick candlesticks are the exact opposite. These candlesticks represent a winning buyer or seller depending on the direction of the wick.

This candlestick shows a battle which has been won by the bears who managed to make the stock price fall, failing the attempt made by the bulls. 


On the other hand, this candlestick shows a battle which has been won by the bulls who managed to make the stock price rise, failing the attempt made by the bears. 

Long wick candlesticks show us a sudden change in the perspective of the market participants about the stock. If a stock which has been continuously falling sees a sudden influx of buyers, this results in a long bottom wick candle. The exact opposite is true for candlesticks which have a long top wick. This is why long wick candlesticks can represent a change in the direction of the stock price & is a key component in spotting reversals. To learn more about the significance of long wick candlesticks, visit this article! 

One key point to remember regarding the long wick candles is that the long wick candlestick was once a big body candle where one side (buyers or sellers) was dominating but before the close of the candle, the other side (sellers or buyers) was able to make a comeback. So, long wick candlesticks show us the historical data of market participants who got caught on the wrong side of the market! 

But not all long wick candlesticks have the same meaning! A quick look at the chart of Tata Motors shows us plenty of long wick candlesticks which might not seem very meaningful on the first glance. 

However, the long wick candlesticks provide us much more information when combined by other factors. 


5 factors to consider about long wick candlesticks 

1. Market structure when the wick is formed

The most important factor which differentiates impactful long wick candlesticks from meaningless long wick candlesticks is the structure of the market. Before analyzing the meaning of the long wick candlestick, we need to understand the structure of the stock/index where the long wick candlestick has formed. A long wick candlestick which is formed near the support of a stock can be a sign of the reversal of the stock.

During a sideways market, wicks which are formed near the support or resistance are much more significant compared to any other long wick candlesticks. 

All of the highlighted long wick candlesticks which are formed near the support caused a reversal in the stock price for Axis Bank. 

To learn more about support & resistance levels and how to find them in a stock, watch this video on YouTube!

On the other hand, during a trending market, traders and investors should not wait for the stock to reach the support levels & should look for long wick candlesticks during every pullback. These long wick candlesticks during the retracement when studied in detail can provide good opportunities for investors and traders alike. 

All of the highlighted long wick candlesticks which are formed on the pullback caused the trend to continue in Dixon. 

Similarly, every pullback in a downtrend where a long wick candlestick is formed can provide opportunities for traders for a short position as it can be seen on the chart of ITC.


2. Length of the wick 

Not all wicks are equal! The longer the wick on a candle, the more emphatic is the victory of bulls (for bottom wick) or bears (for top wick). Consider these two candles which have a long wick. 

It can be seen that one candlestick has a much longer wick compared to the other candlestick. Typically, the longer the wick of the candle, the better confirmation of a change of trend is present. Consider the mindset of the person who sold at the very bottom of a bottom wick candle. This person would be much more inclined to cover his/her losses i.e. buy the stock back if the stock has moved up say 3% (longer wick) as compared to 1% (shorter wick). When this person loses his position, the price of the stock would move even higher because in order to close the short position, a buy order needs to be placed. So, a longer wick gives us a better confirmation of the change in trend compared to a shorter wick which might get broken much more easily. 


3. Direction of the wick

This is not as important as the market structure or the direction of the wick. However, the direction of the wick can also play a role in the confirmation of the trend reversal. If the stock is close to its support zone & we are looking to take a long position, then a candle with a big bottom wick is ideal. A big bottom wick suggests that the buyers have won the battle & is inline with the direction of the long position which we are planning to enter. However, even a candle with a top wick might be sufficient evidence of a trend change. Let’s consider a candle with a top wick again. 

In this case, we can see that a candle with the top wick was initially a bullish candle which eventually turned into a long wick candle when the sellers arrived at the scene. However, it doesn’t guarantee that the sellers are the smart guys here! It is entirely possible that the initial buyers were the smart players who were right all along. Therefore, it is highly recommended to watch the behaviour of the stock after the long wick candle is formed. Even a top wick candle near a support might be a sign that the smart buyers are becoming interested in a beaten up stock. 


4. Presence of wicks on both sides

The presence of two wicks on either side is a sign of confusion within the market. This type of candlestick is generally referred to as the “Doji” candlestick. 

It shows us that both the buyers and sellers are strong & the market participants are unsure about the direction of the stock. Even though a Doji candle can be a sign of a trend reversal, such candles are generally followed by another long wick candlestick which can provide a much clearer signal of the reversal of the trend. Simply trading or investing based on a Doji candlestick is not recommended.


5. Two consecutive wicks

What’s better than one long wick candle? Two long wick candles! If you see two or more consecutive long wick candlesticks where the wicks are in the same direction, it is a much stronger signal of the direction in which the stock can move. If a stock has given multiple bottom wick candlesticks, it might be a good idea to enter a long position in the stock. 

Consider the example of ITC where multiple bottom wicks were observed in the stock within a short span of time. These wicks eventually caused the stock to explode upwards with a strong green bullish candle.

Remember that with every bottom wick formed, the sellers will keep on losing hope on their trading position. When enough sellers have lost hope, that’s when the stock will give a strong up move! 


Only a wick is not sufficient!

Even though wicks provide us with crucial information about a potential trend change in the stock, only a wick is not sufficient for an investor or trader to enter a position in a stock. There are many other factors which a trader or investor should consider before entering a trading position – retracement levels, volume, support & resistance and momentum. These factors can play a key role in differentiating a high probability trade from a low probability trade. To learn more about this, visit this article – 5 factors which can boost your trade selection! 


What does a long wick candlestick mean for investors & traders?

The formation of a long wick candlestick should always be on the radar of every investor and trader. A long wick candlestick combined with all the factors discussed can provide an amazing opportunity for investors and traders alike to enter a position in a stock. A smart investor should look for more safer opportunities such as a long wick candlestick on a deep retracement whereas a smart trader might look for a long wick candlestick on a high momentum stock. Regardless of your time horizon for the investment or trade, a long wick candlestick can provide a great opportunity for profits in the market. However, the final decision of investment or trading depends entirely upon the reader! 


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DISCLAIMER : I am not a financial advisor. I am not for or against any company which I have mentioned in this article. All the information provided here is for education purposes. Please consult a financial advisor before investing.


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Namit Pandey

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