Risk Management
Wick Low
Using the low of a candle's wick as a structural support level for stop placement, and one of the more reliable levels for defining where you're wrong.
What It Is
Not every wick matters, a small lower wick is just normal price action. But when you see a big lower wick on a weekly candle, one where the wick is large relative to the body, that's telling you something significant happened. The stock sold off hard during the week and buyers aggressively pushed it back up before the close. The bigger the wick relative to the body, the more conviction was behind that buying.
The low of that big wick becomes a structural level because it represents tested demand. It's not a theoretical line you drew on a chart, someone actually bought there and pushed the price all the way back. And because weekly candles compress an entire week of action into one bar, a big lower wick on the weekly represents a lot of buying conviction at that level.
The low of that big wick becomes a structural level because it represents tested demand. It's not a theoretical line you drew on a chart, someone actually bought there and pushed the price all the way back. And because weekly candles compress an entire week of action into one bar, a big lower wick on the weekly represents a lot of buying conviction at that level.
**NXT Weekly.** The circled candle has a big lower wick where buyers stepped in around $83. The dashed line marks that wick low as the reference level. The stock held above it over the following weeks and ran from there to $136+. That wick low became the line in the sand.
What makes a wick low useful isn't just that it's a low point. It's that buyers already proved they're willing to step in at that level. If a stock drops to $83 intraweek but closes at $89, that $83 wick low tells you there were real buyers at $83 and that becomes your line in the sand. You can use that level to manage risk because you want it to hold, and if it breaks below where buyers already showed up, something has changed and you want to be out.
I've found that using the wick low as a stop level lets me get involved earlier than waiting for the close of the prior candle to be taken out. Normally you might wait for price to push through the prior week's close, but the wick low gives you a defined risk level that's already been validated by real buying activity. Same risk management, earlier entry, tighter stop.
I've found that using the wick low as a stop level lets me get involved earlier than waiting for the close of the prior candle to be taken out. Normally you might wait for price to push through the prior week's close, but the wick low gives you a defined risk level that's already been validated by real buying activity. Same risk management, earlier entry, tighter stop.
Seeing it in a real trade: ET using the wick low as a stop
In the ET trade from the Feb 9 weekly digest, the prior week's candle had a big lower wick where buyers stepped in. On Monday the stock was sitting tight above that wick low so I used it as my stop and entered. The entry chart shows the dashed line at the wick low, that's the exact level I was using to define my risk.
Normally I would wait for price to push through the close of the prior week's candle, but because that big lower wick gave me a validated level, I could get involved earlier with a tighter stop. Buyers stepped in behind the entry all week and ET put in a strong weekly candle and the wick low stop was never threatened. You can see the full progression in the trade walkthrough.
Normally I would wait for price to push through the close of the prior week's candle, but because that big lower wick gave me a validated level, I could get involved earlier with a tighter stop. Buyers stepped in behind the entry all week and ET put in a strong weekly candle and the wick low stop was never threatened. You can see the full progression in the trade walkthrough.
Why It Works
The low of the wick represents tested demand. It's not theoretical support like drawing a trendline or picking an arbitrary number, someone actually bought there and pushed the price back up. That's as real as support gets.
What I've found is that the wick low lets you define your risk with a level that has already been validated by real buying activity. You know exactly where you're wrong. And because the stop is tighter than waiting for a close-based level, you can size up with the same dollar risk. If your stop is 2% away instead of 4% away, you can take a much larger position for the exact same risk in dollars.
This is especially powerful on shakeout candles, when the stock dips below a prior level, triggers everyone's stops, and then snaps back. The low of that shakeout wick becomes a really important level because it represents the maximum extent of selling pressure and the exact point where buyers overwhelmed it. If you see a stock shakeout below a prior low and recover, that wick low is one of the strongest levels you'll find because it just proved it can absorb the selling.
What I've found is that the wick low lets you define your risk with a level that has already been validated by real buying activity. You know exactly where you're wrong. And because the stop is tighter than waiting for a close-based level, you can size up with the same dollar risk. If your stop is 2% away instead of 4% away, you can take a much larger position for the exact same risk in dollars.
This is especially powerful on shakeout candles, when the stock dips below a prior level, triggers everyone's stops, and then snaps back. The low of that shakeout wick becomes a really important level because it represents the maximum extent of selling pressure and the exact point where buyers overwhelmed it. If you see a stock shakeout below a prior low and recover, that wick low is one of the strongest levels you'll find because it just proved it can absorb the selling.
How to Apply It
- 1On the weekly chart, find a candle with a significant lower wick, the bigger the wick relative to the body the stronger the level
- 2Mark the exact low of that wick as your reference level, this is your line in the sand
- 3If the stock is in an uptrend or showing signs of a character change, you can use that wick low as your stop on a new entry the following week
- 4Enter when the stock is sitting above the wick low, ideally it should be quiet and stable, not volatile and choppy
- 5Place your stop just below the wick low, if that level breaks the buyers who defended it are gone and your thesis is wrong
- 6Watch for shakeout candles especially: a wick that dips below a prior low and recovers is the most powerful version of this setup because it just absorbed all the selling
“When you have a big lower wick, the low of that wick becomes an important level. It's where buyers already proved they'd step in, and one of the more reliable levels I've found for defining where you're wrong.”