An upper wick refers to the upper tail or shadow on a candlestick chart that extends above the high price for a specific period. It provides important information about the trading range, volatility, and buying/selling pressure during that time frame. Understanding upper wicks is crucial for technical analysts and traders looking to make sense of candlestick patterns and trends.
The Anatomy of an Upper Wick
Candlestick charts are a visual representation of price action over a set period of time. Each candle provides key details at a quick glance:
- The open – The price at the start of the period
- The close – The price at the end of the period
- The high – The highest price reached during the period
- The low – The lowest price reached during the period
The thick body in the middle shows the range between the open and close. When the close is higher than the open, the body is green or white. When the close is lower, the body is red or black.
The upper and lower wicks demonstrate the extremes reached that did not close within that range. The upper wick stretches from the top of the body to the highest point, while the lower wick reaches from the bottom of the body to the lowest point.
A longer upper wick shows prices stretched higher at some point, but closed lower by the end of the period. This is an important signal when analyzing candlestick patterns.
What Does an Upper Wick Indicate?
Upper wicks can form for several reasons and have different implications depending on the context:
Rejection of higher prices – A long upper wick shows strong buying pressure during the period that drove prices higher. However, sellers then stepped in and pushed the price back down from those highs to close near the open or lower. This may signal bullish momentum is fading.
Volatility – Large upper wicks indicate wider price swings and volatility. If the upper wick is particularly long compared to recent candles, it could suggest a spike in volatility is underway.
Selling climax – Near an intermediate-term bottom, a candle with a long upper wick and small lower wick may form after a downtrend, signalling a climactic selloff. This could be an early sign the trend is reversing higher.
Higher open tested – If the open is near the high and it forms a long upper wick, it shows the higher open was rejected and pulled back lower by the close.
Resistance level – Upper wicks may form near identified resistance levels as bulls attempt to push prices higher before getting rejected back down. This indicates the validity of that price hurdle.
Upper Wick Patterns
Analyzing a series of candlesticks with upper wicks in context with prior trends and support/resistance can provide useful trade signals. Here are some common upper wick patterns:
Bearish engulfing candle – This candle has a long body engulfing the previous candle and a small lower wick. The upper wick is long, showing the high was sharply rejected. It signals confidence in the uptrend is diminishing.
Shooting star – This candle has a small lower body near the lows and a long upper wick. It shows rejection of higher prices after an advance and a potential trend reversal signal.
Spinning top – This candle has small real bodies with wicks extending both above and below. It reflects uncertainty in the market direction ahead.
Doji – This candle has almost no body, showing indecision with the open and close at the same level. The upper and lower wicks display a wide range and volatility.
|Bearish Engulfing Candle||Long red body engulfing the previous green body candle. Small lower wick and long upper wick.||Shows strong rejection of higher prices and potential reversal of uptrend.|
|Shooting Star||Small body near low with long upper wick. May form after advance.||Signals weakening upside momentum and potential trend reversal.|
|Spinning Top||Small body with long upper and lower wicks. Reflects indecision.||Shows consolidation and neutrality in the market direction ahead.|
|Doji||Open and close at the same level. Long upper and lower wicks.||Highlights market indecision and volatility.|
Trading with Upper Wicks
Technical traders can incorporate candlesticks with long upper wicks as part of a robust trading approach that combines other indicators to confirm signals. Here are some ways upper wicks may be used:
Spotting reversals – Look for long upper wicks near support to signal potential trend reversals. Combine withvolume spikes for confirmation.
Identifying resistance – Upper wicks at the same price levels across multiple candles may indicate solid upside barriers.
Confirming breakouts – If upper wicks start shrinking on candles breaking above resistance, it helps confirm the validity of the breakout.
Planning entry points – Enter long trades on pullbacks to the upper wick lows after bullish breakouts. Use stop losses below the wick lows.
Analyzing volatility – Spikes in upper wick length may signal volatility expansion ahead, impacting risk management.
Using with other indicators – Factor in overbought/oversold oscillators, moving average crosses, and other tools to confirm upper wick signals.
No single indicator provides perfect signals. By combining candlestick patterns with other technical techniques, traders can improve timing and confirmation for higher probability trades.
Real World Examples
Looking at real trading scenarios helps illustrate how upper wicks work in practice:
Rejection of Higher Prices
This daily EUR/USD chart shows a series of candles with long upper wicks around the 1.18 to 1.185 resistance area. Each time the price moved above that zone over several days, sellers stepped in to push it back down as seen by the long wicks. This demonstrates that overhead barrier is limiting further upside.
On this hourly S&P 500 futures chart, an extended downtrend leads to a climactic selloff, reflecting panic selling. This capitulation is marked by a long bearish candle with a huge upper wick and small lower wick. Such selling extremes often precede at least a counter-trend bounce as bears cover positions.
Here we see Bitcoin staged an upside breakout above $10,000 resistance, marked by shrinking upper wicks on the candles. A temporary pullback to retest that broken resistance provides a buying opportunity. The upper wicks form around the new support level on the pullback, showing buying interest.
The upper wick is an important, yet often overlooked component of candlestick analysis. It provides valuable insights into market psychology and critical context for trading signals. By highlighting extremes in price action and volatility, upper wicks help traders evaluate technical conditions and improve the odds of successful entries and exits. When combined with other indicators, upper wicks become even more powerful predictive tools for spotting turning points and capitalizing on emerging opportunities in the markets.