The Candlestick Wick Offers a Key Shortcut during Forex and CFD Trading

April 30, 2017 08:00

Have you ever hesitated when analysing a candlestick wick and wondered what kind of importance it had?

This article discusses how candlestick wicks can be simply analysed to understand the market sentiment quicker and more efficiently. I will, of course, explain exactly how the wick and the wick percentage are calculated but then also indicate the meaning behind the wick percentage of a candlestick.

How to measure the wick of a candlestick?

The candlestick has a wick on both the top and bottom of the candle. Traders can therefore calculate two wicks for each candle, although typically only one of the two is relevant for actual trading decisions (see next paragraph).

Calculating the wick percentage of a candlestick only requires a few steps. Here is the process for the top wick:

  1. Find the candle high and note or remember the price level.
  2. Find the candle close and open and use the level which is highest.
  3. Subtract the candle high (step 1) from the open/close (step 2).

Here is the process for the bottom wick:

  1. Find the candle low and note or remember the price level.
  2. Find the candle close and open and use the level which is lowest.
  3. Subtract the open/close (step 2) from the candle high (step 1).

For instance, a bullish candle has the following parameters:

  1. High: 1.0700
  2. Close: 1.0695
  3. Open: 1.0650
  4. Low: 1.0647

The top wick is 1.0700 — 1.0695 = 5 pips.
The bottom wick is 1.0650 — 1.0647 = 3 pips.

How do I measure the wick percentage?

Now that the wick size is calculated, it is important to compare it to the total size of the candle. This will provide Forex and CFD traders with a wick percentage and that in turn gives me information about the market sentiment in each candle.

Here are the simple steps that calculate the wick percentage:

  1. The total size of the candle is the candle high minus the candle low.
  2. The wick percentage of the top wick is top wick size divided by total candle.
  3. The wick percentage of the bottom wick is bottom wick size divided by total candle.

If we continue with our previous example, here are the wick percentages:

  • The top wick is 5 pips divided by 53 pips (1.0700-1.0647) for 9.4%.
  • The bottom wick is 3 pips divided by 53 pips for 5.6%.

What does the wick percentage indicate?

The wick percentage offers critical information about the market sentiment during that candle. It provides traders with critical information about whether bulls/bears are in control of a candlestick or not.

Wondering why and how? Let's examine:

The wick percentage simply shows the winner and loser of the battle between bulls and bears in each candle. Countless long and short positions and orders are driving price up and down but when the candle closes, the candle wick (or lack of it) explains who dominates the candlestick.

A candle's close near the high indicates that the bulls are or remain in control:

  1. this could provide traders information that a continuation is likely.
  2. or if there is a breakout occurring, then this could indicate a strong breakout.

A candle's close far away from the high indicates that the bulls have lost control:

  1. this could indicate weakness and a potential bearish bounce, reversal or rejection could take place.

The opposite is equally valid for a candle close near the low, which indicates that bears remain in control. A bearish close which is far away from the low also indicates weakness and potential bullish bounce or reversal.

What wick percentage is key for reversals and breakouts?

Usually, only one side of the wick is important.

When the bottom wick is more important: for instance, if price is reaching a key support level, then the bottom wick matters most because that shows whether a bearish breakout below support or a bullish bounce/reversal at support is occurring.

When the top wick is more important: the opposite is true if price is reaching a resistance level. In that case the top wick is more important to understand whether a breakout or bounce is occurring.

The percentage of the wick is a key ingredient to understand whether control of the candle by bulls or bears is maintained or lost. Here is the table that I use:

  1. 0-5% wick → bears or bulls are very strongly in control
  2. 5-10% wick → bears or bulls are strongly in control
  3. 10-22.5% wick → bears or bulls are in control
  4. 22.5-33% wick → bears or bulls are probably in control but it would be good to closely examine other factors and the overall market structure.
  5. 33-67% wick → nor bears or bulls are in control: indecision.
  6. 67-100% wick → bears or bulls have lost control and reversal could occur.

None of the percentages are guarantees — nothing ever is with trading. These are rough guidelines that I use when price is reaching a key decision zone or point of confluence. It is important to always review and analyse the market structure, trend, patterns, and support and resistance so as to understand whether that candlestick will have any significance. Relatively larger sized candlesticks will have more importance than smaller candles. The same holds true for candles of higher time frames like the 4 hour or daily chart compared to 1 and 5 minute charts.

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