Tale of Tails

I was speaking at an Online Trading Academy alumni event in San Jose last week and we were discussing the major factors in making a decision to enter a trade. One of the items discussed was identifying price itself and which direction it is indicating it wants to move. This week I decided to discuss a simple technique that is often overlooked when traders are reading charts. We are all too quick to look at the squiggly lines we call indicators and oscillators and dismiss the simplest signal available to us, PRICE!

The most common way that price is displayed for most traders is through candle charts. If you are not familiar with the construction of a candlestick, I have included the quick reference below. A green candle usually indicates strength in price and is formed by price closing higher than it opened during that particular period. Conversely, the red candle indicates weakness due to the closing price being lower than the open for that period.

The problem is that many traders end their candle analysis there. You must look to see what the tails (wicks, shadows or whatever else you wish to call them) are telling you. These tails mark the highs and lows of the period. If I asked you what the candle below signifies, you may tell me weakness since it is red.

However with further examination, you will see that there is a long tail to the downside. This means that even though the bears pushed the price lower, there was enough bullish pressure to move price higher before the close of that period. This is actually a bullish candle! Let's see where it was in the whole trend.

A red candle actually indicated that we were ready to bounce off support with a lot of bullish pressure. You have to listen to the tale the tails are telling you. Any candle tail that is above the real body (colored portion of candle) tells that the bulls were not able to hold price up and the bearish pressure moved prices downward. Any tail below the real body indicates buying pressure.

This becomes especially important when price is nearing a level of support and/or resistance. By seeing which force is winning (bulls or bears) we can anticipate a bounce or break of that price level and take appropriate action.

Remember that price gives us clues as to the immediate direction it will go. We just have to be open to viewing it and listen to the tale of the tails!

On a personal note, I just have to share some news. I was just notified that I passed the final exam for the Chartered Market Technician designation. The Market Technicians Association states that the, "CMT designation is the culmination of a certification process in which candidates are required to demonstrate proficiency in a broad range of technical analysis of the financial markets." It is made up of an educational component, an experience requirement, an ethics requirement, and a membership requirement. After a lengthy process (nearly two years!), I am proud to be able to place CMT after my name.