The Long Wick and Body Strategy (Mean Rejection)
Hello traders! Welcome to the Price Action Course. This is the sixth module “Price Action Strategies.” In this lesson, I’m going to teach you how to trade mean rejections, and we will be focusing here on the long wick candle method.
The long wick candle method basically focuses itself on price action analysis or analysis of price structures and focuses itself on key levels, either on corrective moves or at the end of swings. And we’re going to focus on our very long wicks on the opposite side of the move.
But let’s start by defining this method. Now with this strategy, we’re going to focus on reversals at the end of corrective moves or at the end of strings. We are going to use key levels, and we are going to calculate the moves using order flow analysis.
Here’s an example of what could be a main rejection at a key level. Let’s say that this is just a corrective move from a very strong move to the downside, and right here we have a previous low. Price broke with this low and then tested it back as resistance. And we have two long wicked candles that are seeing a rejection and then price continues to the downside. Of course, this is just an example.
We are going to go through actual light examples on the historic price action of the US dollar in just a few minutes. The size of the body of the candle is not important. What we are going to focus on is the wick of the candle. The wick of the candle is what’s important because it is what’s going to show us the rejection to the level.
Now, the wick of the candle has to be larger than the previous candle’s range. Meaning that let’s say that we are looking at the Euro-US dollar on the four hour chart, and that we hit a level and the last bullish candle is a 15 pip candle from high to low. Not from open to close, but from high to low. We are calculating the entire range of the candle.
The next candle is a long-wick bearish candle, but the wick is to the upside seeing the rejection of that resistance level, and the wick of the candle is 20 pips long, meaning the wick of the candle is larger than the entire range of the previous candle. And this means that we have found a mean rejection at this point, and we can go short.
Of course there are some rules that we need to follow when we trade these setups, and we are going to define them right now. First of all, we try to break out of the second candle’s range meaning that if or when we see a long wick candle either to the upside or the downside, we are going to trade.
Let’s grab again this example again of a corrective move to the upside. We are going to trade the short setup after the mean rejection when we break with the actual candle’s range. Meaning that if it continues to go to the upside, we are not going to trade it, but we are going to trade it until we break with the range. And of course, that a more conservative way to trade it is just to wait for the breakout of the actual structure. But here we are focusing on mean rejections, and we are not focusing on structure breakouts. So we are just going to follow the rules, and we are going to trade the breakout of the range.
Now let’s go to the charts and let’s go through a couple of examples. So here’s the Euro-US dollar for our chart, guys. And as you can see, this is a very large range from this low to this high, about 267 pip range. Now the first thing we’re going to do, guys, is we are going to use our horizontal lines, and we are going to focus on the key levels that price might reject. We have this level of resistance to the upside.
We are using the last close and open of these two candles, and we are using the high of the move as our resistance zone because we are going to start analyzing price action from these lows. This is an area of support that we need to closely the watch after we analyze this. You can see the price bounce of this area of the price quite nicely and hit this area of resistance. We have not encountered just yet a long wick to the upside.
Now what are the rules, guys? We need a wick that is longer than the previous candle’s actual range. Now we are going to see if this wick to the upside is actually larger than this entire candle’s range. This range is about 42 pips long, and this wick is actually 49 pips long, so we do have a mean rejection right here.
Now where is our actual breakout zone? Our breakout zone is right here. I’m going to thicken this line for you and I’m going to color it another color, maybe red, so it doesn’t get confused with the actual support and resistance levels that we’ve just drawn.
But what I was telling you about, and this is to show you that we are recording these lessons live, what we were saying is that the wick of this candle seeing the rejection of this resistance area is larger than the previous candle’s entire range.
So this is a very good example of a mean rejection from a long wick candle. The actual rule, or the actual setup, or the actual entry is when we break with the candle’s range to the downside because this is a reversal trade to the downside, so it is a bearish setup. This candle breaks with this range, so we go short right here. This is our entry, and our stop loss has to be above the candle’s wick.
So we are risking 79 pips, and of course we are aiming at these lows for 141 pips, which means that this is almost a 1:2 risk-to-reward ratio trade. If you take a look at the price action right here, I mean after we broke with the down side of the long wick candle’s range, we never looked back and the price eventually hit our targets.
Now, right here, this is another long wick candle, but this is a setup that I would not take just because the risk-to-reward ratio is not there. I don’t have to calculate for you. I don’t have to show you that this wick is larger than this candle’s entire range. If we take the trade right here, we will be risking 112 pips for a possible return of 96 pips. And this is not even a 1:1 risk-to-reward ratio, so I would not take this trade. Remember to always take a better than a 1:1.5 or 1:2 risk-to-reward ratio because you’re not going to win every single trade. Even though these strategies are going to help you filter out the bad setups that you were getting into, you are not going to always win them 100%. So you always want to have a better than 1:2 risk-to-reward ratio.
Let’s go back and let’s see if we can find another nice example of a long wick candle. Right here we have another one. Remember, guys, that you need to use the previous level, and this is a previous high. We always use the body of the highest candle at the resistance, and the highest point of the move, which is this one right here.
Price goes all the way up here, and this wick is about 75 pips, and this candle is 68 pips. So right here we have another bearish setup at a resistance area of a mean rejection by a long wick candle. The actual area of our entry is right here at the bottom of the candle’s range. So we go short right here, and our actual stop loss would be 100 pips. Remember that we are using price action analysis, and what we are going to do right now is we are going to use everything we have learned so far to see where our target should be.
You can see the price was inside of this ascending channel and abruptly broke to the upside. Then we had a long wick rejection to the upside of this area of resistance, meaning that this is just a fake-out to the upside, and this is just a mama trade. Then we go short at the break of this candle’s range to the downside, and we are going to wait to see what price action does when it hits this area, which would be the third test of this ascending resistance.
You can see the price breaks abruptly with it, so we can actually put our targets at these lows right here, which would mean that we were on a better than a 1:1 risk-to-reward ratio, risking 100 pips to gain 150 pips, which is almost a 1:1.5 risk-to-reward ratio.
You have to use everything you have learned so far and not only look for these setups. These strategies are going to filter out the mediocre setups you encounter when you’re analyzing price action, but they will also give you almost perfect precision when trading.
If you want to analyze one last mean rejection, we can go when a price hits this same area of a previous report. We have a 23 pip wick to the upside, and this candle is only 14 pips. So we have a 23 pip to the upside, and the downside wick is this one right here. This is actually our area of entry. When we break this area to the downside, we go short. And you can see that by going short right here, we will be risking about 47 pips. And of course, our targets have to be at this area of resistance for 133 pips, which means we have a almost 1:3 risk-to-reward ratio.
So be careful, and remember that price is cyclical. Whenever a level is broken, price is more likely to retest it. And when it retests it, look for these strategies or these setups to help you with your end trades.