What Does Long Candle Wick Mean in FOREX?
Traders analyze the price action in the foreign currency exchange market, or Forex, in many ways. One method is to study price "candles," which are a type of charting method available in most Forex software. Candles, or candlesticks, show the same information as a conventional bar chart, but the visual structure is altered to emphasize different aspects of performance. Wicks and bodies are two main components of the price candle, and you can discern insight into the market from long candle wicks.
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Candle Structure
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Each candlestick on a chart shows four pieces of information. These are the opening price of the period covered by the candle, the closing price, the highest price during the period and the lowest price reached. On a five-minute chart, each candle shows this information for a five-minute period. The opening and closing price define the "body," which is an obvious rectangle within the candle. The high and low prices extend outside this body to form "wicks" or "shadows." If the closing price was higher than the opening price, the candle is green or white. Otherwise, it is red or black.
History
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The candlestick charting method started in ancient Japan more than two centuries ago by those who traded and analyzed the auctions for rice. The method became popular in modern times because of the ease with which you can quickly visualize the price action of a given period. It is now a common default setting in most charting software programs.
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Wicks
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A wick primarily shows where prices auctioned during the course of the candle's period, despite that the market closed away from these prices. Many well-known candlestick patterns depend on the length of these wicks to predict where price may move next. Consider the "hanging man" candlestick pattern. This is a short body at the top of the candle with a long wick extending underneath. Such a pattern clearly demonstrates that prices opened and auctioned much lower before rising to close near where they opened. The market thus "rejected" these lower prices. A common expectation is that the following candle will lead prices even higher.
Acceptance and Reversal
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When a market rallies strongly and leads to a long candle, the wicks are short if the market closes near the high of the day. In such a case, the "long body" shows that most buyers within the period profited by the end of the period. When a body is longer than its wick, most prices were accepted as fair and led to a continuation of the trend. But when a wick is longer than its body, it shows that the market reversed at some point to close closer to the open, thus forming a shorter body. Candles with long wicks above the body show that a significant number of buyers lost money as prices closed lower.
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