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Overview: Today we will be talking about a critical point to understand when trading candle sticks. What is the difference between wick rejections and wick exhaustion?
The, or one of the, most common means of day trading is by using candle sticks. They are critical to understand what price has done over a certain period of time. Unlike line charts, they give you a FULL understanding of how low priced fell during a period, how high price rose during a period, and the opens and closes of each specific time period. Understanding how price reacted when trading outside of its open and close “body” is very important to being able to understand how price is reactive to different price ranges, news events, or times. There are two common types of wicks that we will look into and discuss: wick rejections and wick exhaustion.
Wick Rejections: Wick rejections are formed by an extreme shift in trader bias/sentiment, we will see a single candle push deep into a range and then before the candle closes be violently taken over by the opposite market participants. When identifying this type of wick, we want to attribute it with a strong volatile market that is very sensitive to different zones and major trading sessions.
It is most common to see these types of wicks at the beginning of major sessions, at the end of major sessions, or during times of high volatility news (like NFP or FOMC)
Characteristics of Rejection Candles include:
- Large Candles
- Large Wicks (typically in zones)
- Wicks will typically be large as or larger than candles
- Very common to see the majority of the wick pointing in the opposite direction to that of the candle close
- During Major sessions
- During Major News
- Bullish/Bearish Pinbars ARE rejection candles
Examples of Rejection Candles
These candles shown above meet all characteristics of a rejection wicked candle: they are during major trading hours, they have large wicks and large bodies (don’t have to have large bodies, just can’t be dojis).
Exhaustion Wicks: Exhaustion wicks are formed by much more subtle opposing market players. When characterizing an exhaustion wick, we are typically looking at a sessions slow times or during times of low volatility in the markets. We can see exhaustion wicks creating short term pull backs during off sessions to further the move during the next major session or we can see exhaustion wicks initiate a longer short term pull back that may last a few sessions. Typically we will see the former.
It is most common to see these types of wicks during minor sessions and at the end of major sessions (if the session was slow).
Characteristics of Exhaustion Candles include:
- Small Bodied Candles (Compared to rejection candles)
- Small Wicks
- Wicks that go both ways
- Have no clear direction
- No clear direction in the candles
- Does not have to be in or on a zone (in or on a zone will typically lead to larger reversals rather than continuation moves)
- Doji Candles are considered Exhaustion wicked candles
Examples of Exhaustion Candles
All of these examples have the same things in common: they are during off sessions, the lead are just exhaustion until major sessions push markets further, and they are all small bodies, small wicked (relative) and have no clear direction.
To conclude, understanding the difference between exhaustion and rejection wicks is important. It boils down to rejections typically come during major sessions and cause reversals while exhaustion tend to occur during slower sessions and lead to fake reversals.