Kangaroo Tail Placment

Kangaroo tails should be near the previous candle. If a kangaroo tail is too far from recent price action, it may suggest a “runaway” market, suggesting the market is not ready to reverse. One way to quantify whether a kangaroo tail is near recent price action is to look at the open and close relative to the nearest candle. If the open and close of the kangaroo tail are inside the range of the previous candlestick, the kangaroo tail is valid (Figures 8.10 and 8.11).

---

---

FIGURE 8.10 This AUD/NZD four-hour chart has a bearish kangaroo tail. Notice the open and close of the kangaroo tail are both contained by the range of the previous candlestick.
[You must be registered and logged in to see this image.]

The easiest way to see this rule in action is to look at an example.The kangaroo tail on the four-hour AUD/NZD chart in Figure 8.10 is an ideal example. Notice the open and the close of the kangaroo tail; both are inside the range of the previous candlestick. It is important for the open and close of the kangaroo tail to be inside the previous candlestick’s range because this suggests that the market is not in a runaway trending phase.Sometimes the market will print a kangaroo tail during a very strong trend. When this occurs, you may see the market pause at a zone, but often the market eventually pushes beyond the zone.

FIGURE 8.11 This candlestick on the NZD/USD four-hour chart is not a valid bullish kangaroo tail. The close of the kangaroo tail is below the range of the previous candlestick.
[You must be registered and logged in to see this image.]

The four-hour NZD/USD chart in Figure 8.11 shows an example of a runaway market. Notice how the closing price on the kangaroo tail is outside of the previous candlestick’s range. This is therefore not a valid kangaroo tail. The very best kangaroo tails will have the open and close of the candlestick well inside the range of the previous candlestick. Other candlesticks with an open and close not inside the previous candlestick’s range are not valid kangaroo tails.

FIGURE 8.12 The AUD/USD weekly chart printed a kangaroo tail at an area on the market chart where we have not seen price action in over 20 years. Thus, we can say that this kangaroo tail has much room to the left. The pair fell over 3,000 pips after this kangaroo tail printed.
[You must be registered and logged in to see this image.]

Take a look at the chart in Figure 8.12. Notice how in this case the market, the AUD/USD weekly chart, prints a kangaroo tail at an area on the chart that is an extreme high. The market has not traded here in some time, in fact, on the chart we cannot see the last time that the market traded at this level.

We could say that this kangaroo tail has much “room to the left.” Why is room to the left important?Why is it that the naked trader seeks out reversal signals that print on the chart on areas that have not seen price action in a long time? The answer is simple: The naked trader is looking to catch extreme reversals, trades that will capture large moves in the market.

Ideally, the naked trader will take a trade just as the market is turning around, at places on the chart where the market will not come back for some time. Remember, the naked trader is not held hostage to indicators, so the naked trader has the ability to be nimble and jump into a trade just as the market is turning around, the naked trader does not have to wait for the indicator to roll over or to indicate the market is turning around.

Obviously, the naked trader never knows for certain when the market will make an extreme high or extreme low. The naked trader does, however, know that when the market turns around at an extreme high or an extreme low, at a spot on the chart that has not seen recent price action, the market often does not quickly return to that spot (see Figure 8.13).

FIGURE 8.13 The weekly EUR/USD chart printed a kangaroo tail in July of 2001.This kangaroo tail has plenty of room to the left, after trading higher than the kangaroo tail, the market has not been back to this zone since this kangaroo tail printed.
[You must be registered and logged in to see this image.]

When the market is in a runaway trend, kangaroo tails often look small compared to the surrounding candlesticks. Take a look at Figure 8.14.

FIGURE 8.14 Although this appears to be an ideal kangaroo tail on the EUR/USD daily chart, the giant bullish candlesticks prior to the kangaroo tail hint that the strong uptrend may continue.
[You must be registered and logged in to see this image.]

This kangaroo tail printed on the EUR/USD daily chart on a brilliant zone.Additionally, the open and the close are inside the range of the previous candlestick, the open and the close are in the bottom third of the candlestick, and there is plenty of room to the left; in fact it has been over 46 days since the market has traded at this zone.

Is this an ideal kangaroo tail? Unfortunately, it is not an ideal kangaroo tail. The big bullish candlesticks prior to the kangaroo tail hint that the market may have further upside momentum. Thus, this is not an ideal kangaroo tail simply because the market is printing giant bullish candlesticks immediately prior to the kangaroo tail. Many failed kangaroo tails follow large candlesticks. The best kangaroo tails have a very large range, often greater than the candlesticks immediately prior to the kangaroo tail.

FIGURE 8.15 This bullish kangaroo tail on the AUD/JPY four-hour chart would have been a losing trade, as hinted by the giant bearish candlesticks prior to the kangaroo tail.
[You must be registered and logged in to see this image.]

Figure 8.15 illustrates another example of a bullish kangaroo tail. Notice the large bearish candlesticks prior to the kangaroo tail, these candlesticks offer a clue—downside momentum may remain in the market. Optimal kangaroo tails will have a large range, usually greater than the range of those candlesticks immediately prior to the kangaroo tail. Be wary of small-tailed kangaroos.