ForexSpirit

The next in the series of shiny trading ideas to catch my beady eyes revolved around long candlewicks.

I stumbled across a relatively simple trading method that uses long candlewicks as reversal points on the ForexNewsTrader website.

It boils down to a wick of 10 pips or more on a EUR/USD 5 minute chart signifying the strong possibility that a reversal is in progress. The long wick indicates that some resistance or support was encountered. If this long wick occurs after a sustained move in one direction then it points to the possibility of a retracement commencing.

You jump in on the retracement, using the extremity of the long wick candle as your stop loss point.

To help play around with this idea I wanted to have something similar to the wick histogram that you can see in the charts on the ForexNewsTrader website.

Since that indicator is not publicly available from TRO (TheRumpledOne) and is for MT4 (which I hardly ever use), I decided to code up my own version.

I did this in NinjaTrader, which I use for my charting needs when demo trading via MB Trading.

This was first experience trying to write a NinjaTrader indicator and it was rather interesting and fun.

My first version was a direct copy of the MT4 indicator, with a histogram of the wick lengths displayed below the price pane. Since my charts were otherwise naked I thought this was a bad waste of real estate space as well as being not very user friendly so I set about to making it more useful.

In its place I decided to place the wick length directly above or below the candlestick itself. This made it much easier to quickly see what the length of any given candlewick was. Since I was only interested in wicks that were 10 pips or greater it was not necessary to show the length of every single wick. I had the indicator only highlight wicks that were 5 or more pips.

This is what it looks like:

I was now able to easily see when a wick of 10 or more pips had been formed and act on it.

I still wasn’t finished quite yet with the indicator. I’m not one for incessant screen watching. I don’t want to have to watch every tick to know when to enter a trade. Even having to check the charts every five minutes to see if a potential entry was in play seemed a bit onerous.

This is especially true for a trading method where a signal can be given at any time of the day. I’m not a full time trader and can’t devote an excessive amount of screen time. I have a regular full time job that needs most of my attention during the day.

To overcome these constraints I added a couple of audio warnings into the indicator. The first was a ‘heads up’ sound to be played when the current bar has a candlewick that is greater than 10 pips and there is 15 seconds or less remaining in any given 5 minute chart period.

This ‘heads up’ sound alerted me to the fact that a potential signal might be forming, while giving me enough time to switch my focus over to the charts to see what was unfolding.

A second alert sound was fired on the first tick of a new candlewick if the previous bar has a wick of sufficient length that a decision was needed to determine if a new trade should be entered or not.

These two sound alerts allowed me to go on with my daily routine and only brought my attention to bear on trading matters when a large wick was formed, which was on a relatively infrequent basis.

Every trading method has its nemesis moments and the chart below exhibits one such very difficult period when attempting to trade just on long wicks would have produced some poor results:

It’s very difficult to see how there could have been anything but losses when trying to trade the 10 or 11 pip wicks that form near the bottom of the move around 10:00. Even the 18 pip wick that quickly follows does not offer any great reward.

Now for some general observations about using this sort of technique.

• Long wicks at major support or resistance levels in a ranging market are going to be pretty strong signals.
• A long wick that is formed after a sustained move is going to be stronger if that sustained move is a retracement in the longer term trend, rather than a sustained move that is part of the long term trend itself. In other words, it’s better if the trade you’re going to enter based on the wick signal is in the direction of the longer term trend.
• Wicks that are greater than 20 pips usually occur in very volatile markets. Best to step aside in this case, or any time when volatility is well above normal, as any support or resistance highlighted by the long wick is not going to be very strong.