Why wicks appear: liquidity and market mechanics
In FX markets, a long wick on a candle is rarely random. Liquidity—orders resting in the market—creates pressure points. When price reaches dense pools of stops or limit orders, it can surge through momentarily to trigger those orders before reversing. That transient excursion shows up as a long wick (or spike) on the chart. Understanding that mechanism helps you judge whether a wick signals genuine continuation, a stop run, or a rejection.
Stop runs vs rejection: how to read a long wick
Two common interpretations:
- Stop run (liquidity sweep): Price aggressively breaches a logical level (e.g., obvious stops) and then reverses. Characteristics: fast move, thin volume on the wick’s tail if visible, subsequent reversal candle back through the level, and execution clustered in a brief time frame. The goal of a stop run is simply to clear liquidity, not to sustain a new trend.
- Rejection: Price tests a level, fails to hold, and reverses—often showing rejection with a long wick but without the same explosive sweep. Characteristics: rejection can be slower, may show consolidation around the level, and is often accompanied by a clear failure to break higher/lower on follow-through candles.
Important: not every wick implies manipulation or a deliberate stop hunt. Market microstructure, thin liquidity between sessions, and algos can create similar patterns naturally.
Context first: a practical framework
Always start with context before labeling a wick. Use these three checks in order:
- Session timing: Identify which session the wick occurred in (Tokyo, London, New York). Spikes near session opens/closes are common because liquidity shifts as banks and traders hand off positions. Overnight or low-volume periods are prone to exaggerated spikes.
- Nearby highs/lows: Mark recent intraday and multi-day highs and lows. Stops and pending orders cluster around these round numbers. A wick that breaches a well-known high/low is more likely to be a stop sweep than one that breaches an arbitrary price.
- Recent structure: Assess trend, support/resistance, and whether price was consolidating. In a clear trend, a wick against that trend at an obvious pullback level may be a stop run. In range-bound markets, wicks near range edges often signal rejection.
Practical signs to differentiate stop runs from rejection
- Speed and candle size: explosive, single-bar spikes favor stop runs; gradual failures suggest rejection.
- Follow-through: if subsequent candles push back through the breached level, that supports a stop run plus reversal; repeated failures to move beyond the wick point indicate rejection.
- Volume/market depth (if available): a spike through depth with clustered fills implies stops being taken; low volume during the wick can mean transient thin liquidity.
- Orderflow clues: access to DOM or foot-print data makes this clearer—look for clustered aggressive orders during the sweep.
Three common mistakes traders make
- Assuming every wick is manipulation: Treating every long wick as a deliberate stop hunt leads to bias. Sometimes thin liquidity and algorithms produce identical-looking spikes.
- Ignoring session context: Reacting to overnight spikes without checking session transitions or liquidity windows often results in poor entries.
- Skipping structure analysis: Trading a wick in isolation, without nearby highs/lows or trend context, increases false signals and stops placed in poor locations.
Quick checklist before acting on a wick
- Which session produced the wick? (Tokyo/London/New York)
- Does the wick breach a recent high/low or round number?
- What was the immediate structure—trend, range, or consolidation?
- Speed and follow-through: rapid spike or gradual failure?
- Is there confirmation from volume, market depth, or follow-up candles?
- Does your plan allow trading this setup (risk, stop, edge)?
Reading wicks is a context-driven skill. Use session timing, nearby highs/lows, and recent structure first, then interpret speed, follow-through, and market depth to differentiate stop runs from rejection. Avoid common mistakes by confirming context and having a clear checklist before acting.
