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Michael C. Thomsett is a widely published options author. His "Getting Started in Options" (Wiley, 9th edition) has sold over 300,000 copies. He also is author of "Options Trading for the Conservative Investor" and "The Options Trading Body of Knowledge" (both FT Press); and "Options for... More
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  • Candlestick Tails - Subtle But Potentially Strong Signals 0 comments
    May 11, 2013 9:03 AM

    Candlesticks involve a lot of terminology, and in the mix of jargon it is easy to overlook the significance of some subtle indicators. There is more to a candlestick than opening and closing price and the session's price direction.

    For example, tails - also known as long shadows - may be among the most important parts of a session's candlestick. Most focus is on the real body, the rectangular middle of the formation. A white real body is found in a day that moves upward, and a black real body signifies a downward-moving day. But most days also have upper and lower shadows. The real body's top and bottom are the opening and closing prices for the session; the shadows give you a glance at the full trading range, representing price movement above or below the open and close.

    When upper or lower shadows are exceptionally long, they are called tails. As a general rule, the longer the tail, the more important it is. A long tail reveals that either buyers (on the upside) or sellers (on the downside) tried to move price further during the day, but the effort failed. The loss of momentum or inability to rally price is very significant. A buyer-led effort (an upper tail) is a bearish sign, because buyers were unable to gain any momentum for greater price appreciation. A seller-led effort (a lower tail) is bullish because sellers were not able to gain any momentum for a larger downward price trend.

    Tails imply overbought or oversold conditions, but they are most significant when they show up after a sustained trend. So when you see an uptrend and then a session with an upper tail, it might signal the end of the uptrend and a coming reversal. When a lower tail shows up after a strong downtrend, it often signals a turnaround and the start of a new uptrend.

    Tails can show up in the middle of a trend; they do not always mean reversal, but may also work as continuation indicators. It is difficult to interpret signals; but when you see a lower tail within an uptrend, or an upper tail in a downtrend, it probably is not foreshadowing reversal. There is nothing to reverse with a bullish signal in an uptrend or a bearish signal in a downtrend.

    Because tails, like all indicators, cannot be relied on alone, always seem confirmation. When tails are found immediately after other candlestick formations, the tail is likely to confirm what the other signal tells you (assuming the indication points in the same direction). You may also be able to use tails to confirm Western signals, including volume spikes and tests of resistance or support. They also have greater significance when appearing immediately before or after strong gaps.

    Tails, as single-session signals, may be strong indicators. But remember, all charting is a combination of interpretive skills and the ability to spot early signs and confirm them. Without confirmation, it is just guesswork. With confirmation, strong signals like candlestick tails are powerful timing tools.

    To gain more perspective on insights to trading observations and specific strategies, I hope you will join me at ThomsettOptions.com where I publish many additional articles. I also enter a regular series of daily trades and updates. For new trades, I usually include a stock chart marked up with reversal and confirmation, and provide detailed explanations of my rationale. Link to the site at ThomsettOptions.com to learn more. As a new member, if you buy a one-year subscription, you also get a free copy of one of my books, including this new one just released.

    I also offer a weekly newsletter subscription if you are interested in a periodic update of news and information and a summary of performance in the virtual portfolio that I manage. All it requires is your e-mail address. Join at Weekly Newsletter I look forward to having you as a subscriber.

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