What Is A Bearish Candle With A Long Top Wick?

What is a Candlestick Chart?

A candlestick chart is a visual representation of an asset’s price movement over a set period of time. Candlestick charts originated in 18th century Japan, where they were used to track prices of rice contracts. Today, candlestick charts are commonly used in technical analysis of financial markets.

Each candlestick on the chart represents the price action for a specific time frame, ranging from 1 minute up to 1 month. The candlestick displays the opening, closing, high and low prices for the time period. A candlestick has a wide part, which is called the “real body”. This real body represents the price range between the open and close. Thin lines or “wicks” extend above and below the real body, showing the high and low price extremes.

By looking at the shape, size and color of candlesticks, traders can understand the relationship between the opening and closing prices. This gives insight into traders’ emotions and whether they are bullish or bearish on the asset over that time frame.

In summary, candlestick charts are an important tool in technical analysis. They provide a visual depiction of price movements, giving traders clues about market sentiment and potential trend changes.

Anatomy of a Candlestick

A candlestick chart displays the high, low, open and close prices for a security over a set timeframe. The basic building block of a candlestick chart is an individual candle, which represents the price action for a specific period.

The main parts of a candlestick are:

• The body – the thick part in the middle of the candle. This represents the range between the open and close price for the period.
• The wick – the thin lines above and below the body. These show the high and low price for the period.

Candles can be either bullish or bearish, indicating buying or selling pressure:

• Bullish candles – these have a body that is green or white in color. The close price is higher than the open price.
• Bearish candles – these have a body that is red or black in color. The close price is lower than the open price.

The color and shape of candlestick bodies and wicks provide a visual representation of the relationship between opening and closing prices and reveal insights into market sentiment over the time period.

What is a Long Top Wick?

A long top wick on a candlestick refers to when the upper shadow or wick of the candle is significantly longer than the length of the real body. It represents a large range between the high and close prices for that time period. Specifically, the top wick shows the highest price the asset traded at before buyers stepped in and pushed prices back down to close near the open.

A long upper wick signals that buyers initially drove prices higher during that period but were soon overpowered by sellers who reversed the price move and forced it to close lower. This long wick at the top represents heavy selling pressure and rejection of higher prices.

Bearish Candles

A bearish candle is one where the closing price is lower than the opening price. This indicates that selling pressure prevailed during the period, with sellers able to push prices lower by the close. Technically, a candle is considered bearish if the close is below the open:

Bearish Candle: Close < Open

The body of a bearish candle is filled or colored in, as opposed to hollow or white for a bullish candle. The filled or colored body represents the distance between the open and close. The upper and lower wicks show the high and low reached during the period.

A bearish candle signals that sellers were in control and driving prices lower. It reflects weakening momentum and emerging selling pressure. Seeing a series of bearish candles indicates a downtrend may be beginning or continuing. Traders watch bearish candles to spot potential exit or shorting opportunities.

Combining Bearish Candles and Long Wicks

A bearish candlestick with a long top wick shows that buyers tried to push the price up but were ultimately rejected. The long wick represents a period of buying pressure that drove the price higher, but sellers then stepped in and exerted enough downward force to close the candle near the open. This combination of a bearish candle body and long upper wick signals that sellers maintained control and drove the price back down despite the brief spike up.

Visually, a long wick bearish candle shows a small box or “body” at the bottom end of a vertical line or “wick.” The body represents the open and close price range, while the wick illustrates the high and low. The small body near the low end indicates bearishness, while the long wick on top shows buyers tried but failed to lift the price.

Overall, a bearish candlestick with a long top wick demonstrates the strength of the sellers in the market. The buyers were not able to sustain upward momentum, and the sellers quickly rejected that move to force the price backup or near the open price. This candlestick pattern is considered bearish because it shows the strength of the downtrend despite a temporary push against it.

Long Wick Bearish Patterns

There are two common candlestick patterns that combine a bearish candle with a long upper wick – the shooting star and the hanging man. Both of these patterns indicate potential short-term reversals in an upward trend.

A shooting star has a small real body near the lows of the candle, with a long upper wick that is at least 2 times the length of the real body. It is formed when price opens near the low, trades much higher, but closes near the open price after rejection. This shows the buyers could not sustain the upward momentum.

A hanging man also has a small real body near the top of the candle, with a long lower wick. It forms when price opens near the high, trades much lower, but closes back near the open. This indicates the sellers were not able to maintain control.

Both patterns signal potential exhaustion of the current uptrend. They are considered bearish harbingers when they form after an advance. Traders watch for confirmation on the next 1-2 candles showing follow through to the downside before considering short positions.

Trading with Long Wick Bearish Candles

Traders can use long wick bearish candles to look for potential short opportunities. The long upper wick shows that buyers pushed the price up during the period, but by the end sellers had regained control and pushed the price back down near the open. This rejection of higher prices often indicates weakening momentum.

When a long wick bearish candle forms after a series of bullish candles, it may signal a potential trend reversal or pullback. Traders may look to enter short positions when the price retests the highs of the wick, with a stop above the wick high. Some traders also watch for bearish candlestick patterns to form, like the shooting star or hanging man, for added confirmation.

To improve the odds of a profitable short trade, traders may wait for the long wick bearish candle signal to align with other indicators. For example, overbought RSI diverging as the price makes new highs, MACD crossing below its signal line, or a break of support on the price chart. Using confluence with other technical or chart patterns can help confirm the bearishness of the long wick candle.

However, long upper wicks alone do not guarantee a reversal. Traders should incorporate prudent risk management with stops in case the signal fails. Long wicks show rejection of higher prices but the market could still resume the uptrend. Therefore, managing risk is critical when trading candlestick signals.

Example of Long Wick Bearish Candle

Here is an example of a long wick bearish candle on a 1-hour EUR/USD chart:

On this chart, we can see the formation of a long red candle with a wick extending above the body. The opening price for this candle was around 1.1350, and the price rose briefly up to 1.1365 where it met resistance and quickly reversed lower. The price continued to fall throughout the remainder of the 1-hour period, closing near the lows around 1.1330.

For traders, this long wick bearish candle would signal a potential reversal at this resistance level around 1.1365. The long wick shows the price was rejected after briefly rising above 1.1365, and sellers then stepped in with force to drive the price back down by the end of the candle close. Aggressive traders may look to enter short positions as the long wick forms near resistance, with a stop above the high of the wick. More conservative traders may wait for confirmation on the next candle before entering.

Overall this type of long wick bearish candle shows strong selling momentum after a failed test of higher prices, and can be used by technical traders to assist with timing entries for short positions, especially at areas of known resistance.

Advantages and Limitations

Recognizing long wick bearish candles can provide several advantages for traders:

Earlier detection of weakness – The long upper wick shows the price was rejected after temporarily trading higher. This indicates the bears were able to take control and drive the price back down. Seeing this rejection and weakness early allows traders to prepare for more downside.

Confirmation of resistance – If the long wick appears at an established resistance level, it serves to confirm the strength of that area in reversing the uptrend. Traders can watch for additional bearish signals around that level.

Establishing support – The bottom of the long wick marks the low point where buyers regained control. This area can act as near-term support to watch on pullbacks.

However, relying solely on long wick bearish candles also has some limitations:

– They must be considered in the larger price context – other indicators should confirm the strength of the signal.

– The long wick indicates potential weakness, but prices could still rally further before reversing. Traders should wait for confirmation.

– Like any single candlestick pattern, they are best combined with other bearish signals rather than used alone.

Summary

A long wick bearish candle refers to any bearish candlestick in which the top wick is significantly longer than the real body. It can signal a potential reversal to the upside when appearing in a downtrend or an inability for sellers to gather momentum to the downside in an uptrend.

The key takeaways about long wick bearish candles are:

• They have a bearish real body indicating the close was lower than the open.
• The upper wick is much longer than the real body, showing sellers pushed the price up but buyers then stepped in.
• They often form at support levels or after a downtrend, hinting at a potential bullish reversal.
• Long wick bearish patterns like the shooting star and evening star can provide trade signals.

For traders, long wick bearish candles show indecision and that bears may be losing control. They provide an opportunity to go long at support or look for bullish reversal signals. However, caution is still warranted until more confirmation comes.