Reading posts that state the obvious isn’t helpful, so I’ll avoid telling you how difficult trading is. You already know. I’ll save us both a ton of time and only add nuggets about longtail candles that moved the needle on my trading account.
How to trade longtail candles? Longtail candles that develop in and around areas of significant historical support and resistance zones offer clear and actionable trade signals.
To trade longtail candles, first:
1 Identify significant support and resistance zones
2 Wait for longtail signal within the zones
By the end of this post, you’ll have a clear understanding of how to trade longtail candles.
I began trading about ten years ago, and my journey, like most traders I know, was a difficult one. In the beginning, I traded with a ton of indicators, which only served to contradict, paralyze and frustrate. Sound familiar?
What Is A Long Tail Candle?
It took me years to really look at the candles and notice the subtleties of what the long tails or wicks were actually saying. Understanding the fundamentals affecting the trade and then reading the candles changed the way I viewed the charts. And that changed everything.
I developed a view of where I believed the market was moving, and then I simplified my trading set-up by stripping away the maze of contradictory indicators. This made execution an almost automated action.
However, a market view and a long tail candle don’t make a trade signal. It’s got to be from a zone of significant historical support or resistance. You are about to learn. Longtails are only part of the story.
Strap yourself in!
Let’s consider for a moment the psychology behind the long tail candle. The struggle between buyers and sellers is a constant battle of will. At its simplest, it’s supply and demand. A greater volume of buyers than sellers pushes prices higher, and conversely, more sellers than buyers send prices down.
A long-tailed candle then tells us something about the psychology of the struggle. Consider a long-tailed candle in an uptrend. The candle opens, and buyers push the price firmly higher in line with the prevailing trend (nothing special there); however, the strength of the move may be noteworthy.
Then, as if from nowhere, a volume of sellers step in and push prices lower, ending the day below the opening price, causing the candle to turn from what looked to be a green-up day candle to a red down day.
The buyers gave it their best shot. All who wanted to buy on the day did so. The market ran out of buyers, and that created a vacuum for sellers to push the prices downwards.
This type of struggle creates the long tail candle. Of course, there’s no guarantee, as you know, the sell signal candle described here will continue to push prices lower, but it’s solid sign prices would like to move lower.
The reverse of the above is true in a downtrend.
1 Identify Support & Resistance
As you clearly know what a long tail candle is, I’m confident you know what support and resistance are. Every chart contains a ton of valid support and resistance zones. Identifying and marking the most significant ones is part of the skill set you’ll develop with chart time.
A stable frequency in the charts would be nice but doesn’t exist. Instead, I rely on the simple concept of history repeating itself, not exactly, but enough to give me an edge.
The concept is familiar to you. A previous price low becomes a possible support zone, and if it breaks through, it becomes a possible resistance zone. You know how it goes. Finding and drawing S and R zones is a skill you likely have already.
However, covering your chart with every possible support or resistance line isn’t going to be helpful. It will lead to paralysis. Drawing only the solid, obvious S and R zones will lead to decisive action.
Why Zones And Not Price Points?
I draw zones on a chart as price needs time and space to do its thing. Sure sometimes it turns at the exact top or bottom of a previous high or low, but that’s not a workable strategy. In the next paragraph, you’ll learn how I pick the zones.
Draw Significant Support & Resistance Zones
Marking significant support and resistance areas isn’t tricky. I use a few well-known support and resistance strategies. Some of you may not be familiar.
Let’s take a look at each strategy and a few charts to put a face to them.
- Old high/lows
- Round numbers
- Fibonacci
- EMA cross
Old High / Low
This is the most common and well-known of them all – Old price high becomes resistance, and if breached, will often be tested and offer support. Conversely, an old price low becomes support and, if breached, will often be tested and offer resistance.
I prefer old price highs or lows with a long tail because longtail candles that form at peaks and throughs are powerful psychological areas. Drawing a horizontal line from the top and bottom of the long tail candle creates a significant zone for future price signals.
Round Numbers
Markets love to hit round numbers and frequently reverse direction after hitting them. I draw a horizontal line above and below round numbers. I look for previous highs or lows around that number.
Although we’re focused on the round number, as said earlier, prices may well reverse in a zone above/below the number. We need to give it some wiggle room.
Fibonacci
Bet you’re already familiar with the Fibonacci sequence and how to apply it, so I won’t go into it here. The Fib sequence is a common support/resistance tool. I like the 50 to 61.8% zone.
I don’t use the lessor Fib levels unless they coincide with a significant previous high or low.
Moving Average High / Low
Of course, you’ve heard of moving averages, but you may not have seen them used in this way. I like to use the peaks and troughs as potential zones for support/resistance. I like the 8 and 21 EMA pairing and use the differential in peaks or troughs as a support resistance zone.
It’s not a complex idea. The chart below will illustrate the concept.
2 Wait for The Sign
With only the most important horizontal zones marked, now comes the hardest part, waiting. Inaction doesn’t come naturally, don’t underestimate how difficult doing nothing is.
Wait patiently, for days if needs be, for the price to enter the zone and present a valid signal.
You may get a reversal signal, a continuation, or no signal at all, and that’s just the way it goes.
Reversal signal – Come in the form of a long tail bar or several longtail bars.
Continuation signal – Price often passes straight through the zone and reverses after a day or so to test the zone. Remember, resistance becomes support and vice versa. A signal in the form of a long tail candle may form, signaling a trade in the direction of the prevailing trend.
Imagine with me for a moment. Price enters a support zone. Your patience pays off. You wait for a lovely big longtail candle to develop so you can relieve your trigger finger.
Let’s also imagine no obvious stand-out longtail candle develops initially, but instead, over the next few days, a whole series of longtail candles develop in the support zone.
Your zone is strong. You chose it because, notably, it’s in line with your fundamental view of the market and crucially combines a number of the aforementioned S & R strategies.
- Historical tailed candle trough
- A round number
- Horizontal support created by previous EMA trough
While convergence isn’t unusual, it doesn’t happen every day, and that’s why we need the patience of a cat.
While we didn’t initially get a single large longtail candle that screamed buy. The series of long tails are still a pretty good sign sellers are getting tired. A trend reversal is likely.
Go ahead, relieve that finger!
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