How to Trade with Long Wick Candles
Key Takeaways
Long wick candles are a chart feature which gives traders clues about an incoming trend change in an asset’s price.
Crypto and traditional asset charts can generate long wick candles, and trading them correctly provides valuable insight into price behavior.
There are several types of long wick candle commonly encountered while trading Bitcoin and altcoins, each with its own identity and potential trading signals.
What are Long Wick Candles?
Crypto traders often use so-called candle or candlestick charts to view price action.
This type of chart is popular because it makes key trading data — open and closing price, swing highs and lows, as well as trend information — visible at a glance.
At the very least, a beginner can look at a candle chart and understand the direction in which price has recently gone simply by acknowledging whether recent candles are red or green.
Long wick candles are a specific type of candlestick within the candle chart itself. There are three classic types, and each offers traders different signals about the asset’s price trend.
Specifically, when an uptrend or downtrend is ripe for disruption or breakdown, long wick candlesticks tend to form, making them an example of a so-called trend reversal indicator. This sets them apart from chart features which suggest trend continuation.
Long Wick Candle Definition
A long wick candle refers to a candle with one or two large “wick” sections surrounding the solid body.
A single-wick candle with the body at the bottom is called a shooting star. Its counterpart, a single-wick candle with the body at the top, is known as a hammer.
If a long wick candle has wicks both above and below the body, with the latter compressed, it is a spinning top candle.
This last type is not technically a trend reversal indicator; rather, it demonstrates a transitory phase within an existing trend setup. Its appearance nonetheless makes it easily stand out as part of the long wick candle family.
How to Identify a Long Wick Candle
Long wick candles are one of those chart features which are visible after a cursory glance at a given asset.
Their distinctive appearance — one or two wicks, also known as shadows, along with the body — make them easy to spot by even entry-level traders.
More complex are the signals that these candles’ wicks and bodies infer, and here, context is more important — where support and resistance levels on the chart already lie, as well as the strength of the current trend.
That said, long wick candles tend to stand out once they emerge, allowing traders to prepare for a potential short-term or long-term trend reversal right away without extensive analysis.
How to Analyze Long Wick Candle Components
Since long wick candles tend to appear toward the culmination of an uptrend or downtrend, traders should bear such an outcome in mind should they start to appear on a chart.
Drilling down further, a given long wick candle can show where support or resistance truly lies during the period covered by the candle. Successive long wicks which end in roughly the same place, for example, highlight where momentum fades and either buyers or sellers lose control of the market.
As mentioned, wicks can occur above or below the candle body — a phenomenon corresponding to uptrends or downtrends respectively. Long wicks above the candle body can preclude the end of an uptrend as buyers lose conviction and sellers step in, while long wicks below can come before an upside reversal.
In both cases, the wicks offer a clue as to where one side gives way to the other.
Bullish and Bearish Long Wick Candles in Crypto
The following examples provide a closer look at the role of long wick candles at uptrend and downtrend reversals.
In addition to the hammer and shooting star formations, spinning tops can also frequently be seen in between stronger directional moves.
Bullish Long Wick Candle
A bullish long wick candle typically occurs toward the end of a downtrend and depicts fading sell-side pressure in a given price zone.
The wick may ‘fill’ a previous candle body by backtesting its closing price as support, or alternatively form a swing low which is not revisited before the trend reverses.
The chart below shows BTC/USD making a local bottom at $54,296 after downside momentum fails to push price toward a previous swing low.
The hourly long wick candle (1) closes only marginally lower than its opening level, whereupon price reverses upward. A subsequent retest of support forms a higher low, with a second long wick candle (2) reaching the opening level of (1).
BTC/USD chart on TabTrader Web
Bearish Long Wick Candle
Bearish long wick candles essentially form the inverse of bullish ones, with the circumstances reversed.
Here, a flagging uptrend ultimately gives way to selling pressure, as demonstrated by one or more wicks to a similar price range which bulls are unable to then cement as support.
The candles thus close lower before the trend begins to head downward.
The XRP/USD chart below provides insight into one such resistance zone which receives a retest but ultimately holds firm.
XRP/USD chart on TabTrader Web.
How to Use Long Wick Candles in Crypto Trading
When a long wick candle is encountered, all of its constituent parts need to be analyzed to discern actionable trading signals.
This means taking into account the length of both the candle’s wick and body, along with the context in which it occurs.
Short-term context is provided by preceding candles, while knowledge of long-term support and resistance levels is also necessary in order to understand what might happen to price after the long wick candle has closed.
Technical Analysis
The BTC/USD 1-day chart below shows an example of bearish long wick candles as part of a short-term trend reversal.
The highlighted candles exhibit classic long wick traits: price closes far below the day’s peak in each case, and the wicks themselves peak at similar levels.
From this, traders can conclude that the candles have hit an important resistance level where sellers repeatedly gain control of the market. Several such occurrences complete before the uptrend ultimately breaks down.
There are also several instances of a long wick candle’s wick being filled by the body of a subsequent long wick candle toward the end of the uptrend where momentum is greatest. This has the effect of emboldening late buyers, who may then become the victims of large-volume traders executing a bull trap.
The TabTrader Academy has dedicated guides to avoiding both bull traps and bear traps.
BTC/USD chart on TabTrader Web.
Risk Management
It is worth noting that price ultimately rejects from the $31,800 area as this was not its first attempt to clear it.
Zooming out, traders can see previous breakouts failing to pass that same level, giving it psychological significance as resistance.
This provides key context which needs to be borne in mind when deciding on the likelihood that future breakout attempts will be successful. In this case, the long wick candles provide a key signal that buyer momentum is insufficient.
The same setup could just as well be observed at the end of a downtrend where it is sell-side pressure which is being exhausted around a local low.
Combining Long Wick Candles With Other Indicators
A long wick candle, despite potentially appearing to be a strong trend reversal signal, is not guaranteed to produce a given result.
Price action depends on more than long wick candles’ presence in an uptrend or downtrend, and entering or exiting on such an event alone is highly risky.
As such, traders routinely ‘backtest’ a long wick candle’s implied signal with indicators designed to offer broader insights into market dynamics. Chief among these is the relative strength index (RSI).
RSI is a trend momentum oscillator which shows the extent to which an asset is overbought or oversold at a given price. Its readings can be applied to repeat visits to any level, including swing highs or lows, to reveal the odds of continuation.
When price reaches the top of a long candle wick, for instance, RSI data can be compared to previous visits to that price. If multiple candles appear, yet RSI declines, this could strengthen the case for a trend reversal.
The chart above provides an example of RSI making lower highs while price makes higher highs.
As the long wick candles begin appearing in the run-up to the macro peak for BTC/USD, RSI shows momentum behind the upside is waning.
Beyond RSI, trading volume can help to reinforce long wick candle peaks. Drilling down to lower timeframes, volume data can show the exact point at which a given trend loses momentum in either direction.
Advantages and Limitations of Long Wick Candles
| Advantages | Disadvantages |
| Easy to identify | Signals require contextual knowledge |
| Offer data ‘at a glance’ | Unreliable as standalone indicator |
| Suitable for beginners and experts | Data can be overwhelming for beginners |
Conclusion
Long wick candles are a classic tool in the crypto trader’s arsenal of market navigators.
Their easy access nature means that even entry-level crypto exchange users can reap the benefits of a trend change indicator with minimal prior experience.
While less complex at first glance than many other indicators, long wick candles nonetheless do not function as a reliable all-in-one trading aid by themselves. To leverage them, traders need knowledge of historical support and resistance levels, as well as market behavior around those levels. Tools such as the Relative Strength Index (RSI) indicator are commonly deployed to achieve this.
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FAQ
What do long wick candles mean?
Long wick candles often appear toward the end of an uptrend or downtrend. They suggest a risk that the trend will soon reverse, and allow traders to see areas of contention between buyers and sellers. This in turn helps traders identify market entry and exit points.
Which candle is best for crypto trading?
Long wick candles are useful for crypto traders looking to take advantage of volatility around key price points where trends may reverse direction. Bitcoin and altcoins offer regular chances to leverage snap breakdowns from an uptrend or breakouts from a downtrend.
Are long wicks bullish or bearish?
Long wick candles can appear in both uptrends and downtrends. The signals they generate depend on their exact location and how price behaved at those levels in the past (if the market is not in price discovery during an uptrend). One type of long wick candle, the spinning top, does not imply specifically bullish or bearish market conditions.
