“Could you kindly explain how to trade the forex market utilizing candlestick wick patterns?” is a frequently asked question that revolves on price action trading. Unfortunately, there are some misconceptions regarding price action, order flow, and what wicks are really communicating when people ask this question.
The purpose of today’s essay is to provide you with an alternative viewpoint on trading price action wicks that most “internet gurus” would not tell you about. You will get a better grasp of candlesticks, what they convey, and how to use them in trading and relating to one another.
This insight, as well as how to trade using candlesticks, will be provided to you via four essential points on forex price action wicks. But, before we get into trading wicks, we need to grasp the underlying philosophy that behind our method.
(Principle #1): The Difference Between Price Action Trading and Candlestick Trading
The approach trading from the premise that
a.) order flow is the primary driver of price movement, and
b.) all active orders in the market are based on ‘information.’ this is the case.
However, to put it another way, trading the ‘context’ of price action is the same as trading the overall ‘structures’ or ‘Gestalt’ of the market. And you will not be able to do this with only one, two, or three candles.
Candlestick traders are those who make trades based on one, two, or three candlestick patterns, such as pin bars, fakeys, or engulfing bars, among others.
Factual note: The fakey pattern or setup is really referred to as the Hikkake pattern, which was given that term decades ago and which today many forex ‘gurus’ have renamed to make them seem more similar to their own.
Candlestick pattern traders, on the other hand, are not referred to as “price action traders.” They are referred to as “candlestick traders.” Essentially, candlestick pattern traders think that one, two, or three candlesticks describe the price action context and order flow in the market, and so provide you with trade settings for the market.
However, you should consider why many critical support and resistance levels continue to hold in the absence of a pin bar rejection. If the pin bar is such a great instrument for detecting and “confirming” whether the crucial support or resistance level will hold, why would it behave in this manner? Why do banks, hedge funds, and prop traders place orders at certain levels far before a pin bar has even formed, rather than relying on the daily charts of the New York stock exchange’s closing price?
When you start asking these kinds of questions, the basis for trading pin bars and candlestick patterns begins to crumble around you. The only thing left to do is attempt to figure out what is driving the order flow in the market as a whole. And you may achieve this by learning to understand and trade the context of price movement. This is the approach we take to the market.
Now that we’ve established a solid framework, we can consider how we should react to forex price action wicks (or any wicks, for that matter).
(Principle #2): All Wicks Are Rejections of Value
In terms of price action and order flow, the core of what a wick signifies leads to the conclusion that all wicks serve as means of communication between traders. In their communication, they state that the order flow has rejected the price and value offered.
If the market approved it, the market would shut at that point and stay there.
There is, however, a ‘but’ in there somewhere. However, although wicks in the forex market represent a rejection of value, they do not occur for predetermined periods of time or in defined increments of pip value.
The meaning of by ‘not for specified lengths of time’ is that they are not going to specify how long the market will reject that move or value from that point forward
a) after their candle has closed, and
b) after their candle has closed.
What is it That Provides You With This Information?
Price action in its broader environment. The purpose of price action context is to provide you with a ‘probabilistic framework’ for what the market is most likely to do in the near future. Wicks will not provide you with this knowledge, nor will he provide you with a probabilistic framework for how to trade in this market segment.
As a result, you must return to the context of price action.
One of the most important things to remember is that forex price action wicks (or any wicks) are indicative of a rejection; however, we cannot predict how that rejection will express itself, so we must use these signals with caution. The implication of this is that 1, 2, or 3 candlestick wicks will not ‘confirm’ a certain kind of rejection (which is what we want if we’re intending to trade the ‘confirmation’ or rejection in the first place).
(Principle #3): The Opening and Closing of the Candlesticks. What Should You Do? (And Do Not Matter)
Wait a minute, how can the opening and shutting of candlesticks be seen to “matter” or “not matter” in this context?
The manner in which candlesticks are opened and closed will be significant in some ‘exceptional’ scenarios. As an example:
1. For starters, if you are trading any form of gap method that involves “opening,”
2. If you are trading particular sorts of breakouts, you should know what they are.
3. If you are trading certain candlestick patterns, you should know what you are doing.
The opening and shutting of candlesticks may be important in a few other situations, but for the most part, the opening and closing of candlesticks are not significant. What matters most is the volume of orders and the pricing. As a result, most institutions, hedge funds, and prop businesses know their pricing ahead of time, regardless of when the market closes on a given day. They know exactly where they want to get in and where they want to go out, regardless of whether the candle is open or closed on the door.
As a result, the opening and closing of candlesticks are significant, but only on a limited scale.