Trading candlestick wicks

Finding the right trading strategy is one thing that can determine your daily results as a trader no matter which market you’re in. Some people will spend a lifetime searching for or creating a viable strategy and then not stick with it. This is why when you find something that has potential you should give it enough testing as possible; both backward and forward.

Candlestick charts have been around for many years. The patterns that form on the charts help a trader decide which way they want to take their trade. One popular style that we want to share with you is about trading based upon what you see on these charts. Wick Trading is what we like to call this particular method. The reason for this is because candlestick lengths and wicks tell stories. We use these stories to try and determine what the future outcome will be. Trades are determined based on the price action on the screen in front of you.
To break this down deeper we will use some images from a MetaTrader 4.0 chart. These charts can be found with most Forex brokers. Although you can trade these wicks on any currency pair with different variations, we will focus on the EURUSD. This currency pair is the most widely traded pair and allows for some of the best movements during the peak trading times.

There are multiple possible methods when seeking out a trading opportunity with these particular candles. We like to use five minute candles to help us find our trades. There are two major setups that become apparent once a candlestick wick has developed.
Let’s go over some of the rules first.

Try to stick with the overall current trend for that day or the current week. (Not critical, but it gives you a bit more momentum) Should the price be at a whole number make sure you use that as the reversal point. We will go over this in more detail. Don’t trade every wick you see. Look for extreme moves with a lengthy wick before you enter the trade. When we say enter a trade we mean a trade going the opposite way of the WICK.

Of course pictures tell us a lot more than words. What you see in the image below (Image 1) is a five minute chart of the EURUSD during the New York Session. This particular trade setup shows how price was consolidating just below the Pink line before it finally made a move through it. The important thing to recognize here is that this line is on the whole number of 1.3000. Whole numbers by themselves can have their own strategies, but for this particular wick trading strategy it makes our decision much clearer.

As the price moves through this number you can know that resistance is going to be strong. The trend was moving slightly upward, but the overall market conditions weren’t super strong. Always look at the time you are trading and keep your eyes open for potential news release times, too. As the price makes its push you can see that the five minute candle had a large eight pip wick. For this method, we want to try and find wicks with seven pips or more. The story behind this wick is that people were acting as sellers going into the whole number and as a result, resistance was building. Price was pushed down hard and in this case people got trapped. They were trapped by the fast selling off of the Euro. Holders of this currency pair jumped on the bandwagon causing the price to drop nearly 50 pips in less than two hours. This makes for a perfect reversal pattern with several additional things working in your favor.

How do you know when to enter?

This is something that will come with time. We look for one of two things for our entry.

We get in immediately after the wicked candle is closed while setting a stop above the wick or near the next area of support/resistance depending upon the direction. This will have to be individually determined for each trade.
The next way we like to trade wicks is to watch the candles’ price climb up this wick after it is developed. This could happen on the next candle or even many candles later. We’ll touch upon this again soon.

How do you know when to exit?

This is probably the most difficult question to answer; it will depend based upon your risk tolerance. Sometimes it’s best to take your scalp and walk away. Other times you want to take some money off the table and let the rest run. This discretion will be up to you as an independent trader. We find it best to always put money in the bank and try to get bigger runs from the rest. If you were to trade 1 standard Lot you could claim .6 and let the rest run with a trailing stop. If you are a binary options trader, you will have a set time for this trade to finish. You are looking for it to close in your direction within the expiry time.

One other way we like to trade these long wicked candles is waiting for some sort of resolution after the fact. Knowing what happened in the past may predict similar results for the future. Not always of course, but if you see a nice wick formed in the early morning it may come back into play later in the day. This means price will have to climb the pole of the wick which carries a lot of resistance or support depending on the direction.

The second Image (Image 2) breaks down trading with a big wick later in the day. You will need to keep a pretty close eye on the market if you want to find trades like these. Notice how price formed a huge 5 minute wick of nearly 20 pips. It then dropped from this wick by around 20 pips depending on where you got in. Look how several hours later this wick was challenged. Here you can choose to let it ride to the top or jump on a shorter trade as the price is rising. The price broke this wick by only one pip. A stop several pips above the original wick would not have been hit.

The price took a while, but it dropped by around 30 pips from the top of this wick. A nice solid trade in this position with a trailing stop could have made you some decent pips.

Obviously there is a lot more to it when it comes to trading candlestick wicks, but this gives you a basic idea of how you can be on the lookout for some different types of trades in the future. All currency pairs are different so be careful to size up these candles before trading them. If you are a GBPUSD trader you may want to wait for a 12 pip wick. This will all come down to the range of the pair you are trading, and is something that you will be able to refine as you keep gaining experience.

Important Notes: Not every wick should be traded. Make sure you have more than just the wick working for you. Also, keep an eye out for big moves during off peak times that form a wick. These wick reversals tend to retrace the most current move giving you the full length of that original move. You can scalp these trades or look for bigger moves. This will all depend on your individual risk tolerance. Not all wicks will hold, so make sure you have a reasonable stop in place for your protection.