How To Trade Candlestick Wicks

how to read candle wicks

As an asset’s price is plotted over time using Japanese candlesticks, they form a Japanese candlestick chart of many candlesticks. The graph you see below is a 4-hour candlestick chart where each of the candlesticks represents a 4-hour period. A bullish candlestick forms when the price opens at a certain level and closes at a higher price.

Bullish Harami Cross

  1. Long bodies represent significant movement in either direction (up or down), while short bodies signify minimal price change over a given period.
  2. The line graph provides a noise-free way of looking at price and at no point did the line graph provide a scenario that would have lead to a premature exit.
  3. We also thoroughly test and recommend the best investment research software.
  4. A downtrend is in play, and a small real body (green or white) occurs inside the large real body (red or black) of the previous day.
  5. An engulfing candle is a two-candle pattern where the second candle completely “engulfs” the range of the first candle.

A Doji candle is a pattern whereby the open and close prices are almost equal. This usually signals a potential battle between buyers and sellers, leading to indecision in the market. Depending on preceding candles, a doji candle could signal a reversal of trend or increased momentum in an existing trend. The length of the body and wick provides insight into a stock’s overall sentiment. Long bodies represent significant movement in either direction (up or down), while short bodies signify minimal price change over a given period.

Recognize Bullish Candlestick Patterns.

The candles formed 2 wicks and most traders will most likely get easily scared out of their trades. However, by now you should understand that as long as we do not see a major move away from the wicks, the trend has a good chance to continue. The smaller the timeframe you use, the closer you look into the price action of the asset. When you switch to the H1 chart, you will have 4 times more candles.

how to read candle wicks

Hammer Candlestick Family

The Max Drawdown was -31%, versus the stock’s drawdown of -59.7%, which shows less volatility than a buy-and-hold strategy. I use Candlestick charts exclusively when doing my analysis when you get used to how they work; they provide an unparalleled inside into the short-term market dynamics of a given stock. Even though the pattern shows us that the price has been falling for three straight days, a new low is not seen, and the bull traders prepare for the next move up. The Bullish Harami Cross is similar to the Bearish Harami Cross but signals a potential bullish reversal. It’s a pattern that I often use in conjunction with other indicators for maximum effectiveness. The Bearish Harami Cross is a variant of the Bearish Harami but involves a Doji candle.

Like the doji, a hammer candlestick pattern indicates that a price reversal might be on its way. To spot bullish candlestick patterns, look for closing prices higher than opening prices, indicating that buyers are exerting more upside pressure. An engulfing candle is a two-candle pattern where the second candle completely “engulfs” the range of the first candle. Candlestick charts have four main parts, open, high, low, and close.

A bearish candlestick forms when the price opens at a certain level and closes at a lower price. The default color of the bearish Japanese candle is red, but black is also popular. The basic things to remember about candles are they are hollow it’s bullish, filled it’s bearish. Additionally, how do you calculate a payback period the length of the wick shows the volatility of the day’s trading. Finally, if the candle body is towards the top of the bar, it is positive, and at the bottom, it is negative. The Bullish Harami Cross pattern signals a possible end to a bearish trend and the commencement of a bullish trend.

The key is to use this information in conjunction with other indicators and market data for a well-rounded trading strategy. It consists of a bearish candle followed by a bullish candle that engulfs the first candle. The candle might look the same, but the previous trend and its direction give different signals. Notice that each candle pattern in the hammer family is a reversal pattern that could be bearish or bullish depending on what directional move preceded it. Let’s say you switch to a daily or D1 chart, where each candle represents 24 hours.

The green arrows represent moves higher while the red arrows represent price declines. Based on my research, the best candles to trade are Inverted Hammers, Bearish Engulfing, Gravestone Dojis, Bearish Marubozus, and Harami patterns. The percentage of Bearish Marubozu winning trades was 56.1%, with an average winning trade equalling 4.1%, significantly higher than the average performance across all candlestick types.

A candlestick without either a top or a bottom wick indicates that the opening or closing price was also either the high or low. For a stock chart, a typical time period would be one day, and each candlestick is said to “form” over the course of that day. On a Forex chart, which displays currency prices, a single candlestick might form in just 15 or 30 minutes. A candle reversal pattern is a type of candlestick formation that can signal a potential trend reversal. Popular candle reversal patterns include the Hammer, Bullish Engulfing, and Bearish Marubozu patterns. The Gravestone Doji candlestick pattern emerges when a trading session’s opening, closing, and low prices closely align.

A 0.62% win rate indicates that if you go long on a Bearish Engulfing and sell after ten days, you can expect an average profit of 0.62% per trade. Conversely, if you short-sell a Bearish Engulfing, you should anticipate a loss of -0.62% per trade. This substantial evidence solidifies the bullish nature of this pattern. Just above and below the real body are often seen the vertical lines called shadows (sometimes referred to as wicks). For example, candlesticks can be any combination of opposing colors that the trader chooses on some platforms, such as blue and red.

There is no “most accurate” pattern as they should all be viewed as indicators of what bull or bear traders might be thinking—but some traders have preferences and act on specific patterns. Candlestick charts originated in Japan over 100 years before the West developed the bar and point-and-figure charts. Going forward I recommend you start paying attention to candlestick wicks when they occur so that you can make the right assumptions in the future.

Some advanced candlestick charts also incorporate volume data, providing an extra layer of information that can be invaluable for traders. The color and shape of the candles can quickly indicate market sentiment, helping traders understand the balance between buyers and sellers. Candlestick charts offer a clear visual representation of market data, making it easier for traders to interpret price movements at a glance. The Bearish Evening Star is a three-candle pattern that signals a potential reversal from a bullish trend to a bearish trend. It’s a pattern that I often discuss in my advanced trading courses due to its reliability.

Bullish patterns like the Morning Star or Hammer indicate potential upward movement. These are patterns you want to look for during a downtrend as they can signal a reversal. Of course, trading such wicks blindly without confirmation is not a smart move either, but they can be used as an important building block for a trading strategy. If you are interested in more in-depth technical analysis, take a look at our premium online courses. Of course, with the benefit of hindsight, we can see that the price broke the support shortly afterward, but you will be able to spot such a pattern time and time again. Furthermore, the idea of strength into the direction of the wick will also help us when staying in trades with confidence.

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