Wicks, a Guide on How to Cut Loss and Take Profit

Wicks are an interesting phenomenon in price candles formations and are a part of every candle. Wicks can be formed on the top, bottom or both sides of a candle, and they represent the highs and lows of that candle during that period of time.

What is important to remember after reading this article is that the wicks are basically 'rejection' areas where the market simply rejected the prices of the wick. It is important to note that we are talking about the "Close" of the candle and the wicks it forms after candle closes. it is the final and permanent shape of the candle.

When you see a long wick, it clearly confirms that market participants rejected the price move in that direction during that period of time, therefore, prices weren't accepted. Whereas, if prices were accepted, then the price would remain there for a decent amount of time and most probably close somewhere around there. And since the relationship between "when" and "what" is considered a crucial one in business, however, its importance rises in this context, which is the market's rejection to the price value during that specific period of time.

If we are talking about 5min charts here, then the wick formed is for only relevant to 5 minutes charts, which are non-essential or of real impact. However, when you start to look at 4 hour or daily charts, then they are of great significance.

If you think about it, day traders are only witnessing two or three 4 hour candles during a day. So in order to have a long wick on a 4 hour chart, then forces behind the price move must be very strong and important which dominants a trading session. And since day traders will rarely take notice of this move because it take a long period of time to form - hence they will usually end up trading against the price action trend, which basically supports the conflict of interest theory between the retail investors and commercial brokers and somehow explains it.

It is always preferable to use the 4 hour chart when working with strategy, or when a long wick forms on the daily chart.

Take a look at any chart, notice how every time the index reversed, it did so with a very long wick that tops or bottoms at the same price level. This usually gives an idea that market participants simply did not accept prices at these levels, simply because the supply didn't coincide with the demand at that specific time frame (No participants), Therefore, sellers aggressively entered the market quickly causing the pair to drop fast which was the confirmation of the drop.

If a long wick is formed on a daily chart, day traders across all time zones should take note of it and really be confident about their trade going against the wick, especially given enough conviction via technical or fundamental analysis. The main reason is that market participant has rejected that price level that entire day. With that being said, hedge managers always incorporate this approach to target range trading or breakouts, in both cases, these guidelines serve as "Risk Management" principles if applied properly.

Since the wick represent the high and low price of a candle, and is an area of "rejection", then the probability of trading inside the wick in the very near future is pretty low, which means that trading within daily candles' region is going to be less likely, and so your Stop Loss order.

It should be noted when analyzing price action that the market will usually make a second attempt on the previous rejection level (wick's tail). If you take a look at any currency chart, you will notice how these levels serve as support levels. For that reason, when basing decision using the Wicks Strategy, a trader should account for another test to the previous wick's tail; thus, using the tail will offer a better risk/reward opportunity.