As I am sure we have all seen before it is common when there is a big Bitcoin move for a liquidation cascade, with prices wicking down further because of overleveraged market participants within the system capitulating their positions. This usually forms a large wick as price bounces. Jimtalbot (on twitter) has spoken about how price usually goes to fill in these wicks after, I have back tested this theory to see the stats, having an edge like this helps you to make informative decisions when something like this forms. As per usual will be analysing this on the 1 day chart.
https://blog.bitmex.com/announcing-the-launch-of-the-perpetual-xbtusd-leveraged-swap/
This is for Up-Wicks and Down-Wicks. An example is below, in this case it is on a down-move, however the opposite would apply for an up-move. Price thrusts down as sellers think price is at higher than fair value filling buyers orders lower down, at first as a normal move, however as panic occurs and pressure gets higher overleveraged apes start to get liquidated, this forces price down harder as exchanges such as Binance and FTX sell as soon as buyers are liquidated, this forces a deep candle which usually retraces a fair amount as books are less liquid and heavy buyers step in.
I have started from the 13th of may, 2016. This is when Bitmex first offered leverage for market participants so this is really when the theory became relevant. I have a sample of around 222 wicks. The results may be less relevant for the current climate due to the fact that a lot of the results came from 2016–2019 where there were plenty more wicks due to the market being less liquid. However I do believe this method is still relevant, with wicks leading the way generally.
Results
Days to fill — This is the amount of days that an Up-Wick/Down-Wick takes to fill. Helpful to know due to the fact that a lot of these candles technically did get filled because of how volatile the asset is, but they could've been filled many months after, which really doesn’t count.
Up-Wick — Wick on top of the candle, has to be at least 4% in length from the open/close of the candle.
Down-Wick — Wick at the bottom of the candle, has to be at least 4% in length from the open/close of the candle.
Never Filled — This is a wick that was never revisited by price.
Slightly Filled — This is a wick that was revisited by price, but not completely eclipsed.
Observations/Statistics
I analysed these wicks and identified how long the market takes to fill them. Out of 222 wicks only 15 were never filled, this means that there is a 0.07 chance that the wick doesn't get filled. Therefore the probability that a wick doesn't get filled by price later on, regardless of whether it is a up-move or down-move you can follow where the wick is pointing, this is especially relevant at the moment with the down-wick that has been formed. It is very likely at some point it get fills, patience pays. You can also see that a down-wick that is larger than 10% has a larger than 50% chance of being filled after 7 days.
An observation I made was that usually if you get a large wick down, and price thrusts forming another wick, filling 40%-100% of the first wick, it is likely a local bottom or close to a local bottom, as it is clear that there are buyers demand.
When the wick was slightly filled by price on the downside, price on average moved back 54% of the wick. You can see a perfect example of this above, and as I mentioned before price bounced as soon as it got rejected. This demonstrates high buying pressure, and therefore it is easy to derive that price may look for up from there.
It is good to focus on the 10%+ down move wick, this is because it usually creates the most fear. out of the 22 wicks I saw that were 10% or larger, only 2 were not retraced fully/at all. As I have mentioned patience does pay and waiting for a full retrace is usually a smart play when trading on these wicks.
There is a 13% chance that price does not fill in the full wick for both the upside and downside. The chances are even lower for +10% moves. It is therefore much smarter to be patient as you are otherwise taking a trade where the chances of you winning are more than 1:5, this is a R/R that you would probably not take if it was a trade.
If price does not retrace a downwick which is between 4% and 10% the day after, you can assume that it is going to be filled at some point after 7 days.
Conclusion
I believe that this is an incredibly good indicator, wicks do seem to be a leading indicator in where the market is going to get taken next. If you are patient you can likely catch great market moves in the direction of the wick. However you have to trade your setups and you will likely lose a lot of money if you trade this as your sole indicator, this works in confluence with other trading techniques.
Again I am not perfect so at points there have likely been some mistakes here, but hopefully it has been a good read and helps you to understand the probabilities of each move.
Trade well,
Scarpa
