If you have ever traded in the foreign exchange market, or Forex, you may have heard the term “kangaroo tail.” A kangaroo tail is a candlestick pattern that can be used to signal a potential reversal in the market. In this article, we will take a deep dive into what kangaroo tails are, how to recognize them, and the different ways that you can trade them.
What is Forex Trading?
Forex trading is the simultaneous buying of one currency and selling of another. Currencies are traded through a broker or dealer and are traded in pairs. For example, the euro and the U.S. dollar (EUR/USD). The reason you would want to trade currencies is because of the inherent volatility in the foreign exchange markets. Currencies fluctuate based on economic news and events such as inflation, employment reports, etc. When these things happen, it creates opportunities to buy or sell a currency at a profit.
The foreign exchange market is the largest financial market in the world with a daily turnover of over $5 trillion. That is more than the stock market and bond market combined! Because of this, it provides some of the best opportunities for traders to make a profit.
What are Kangaroo Tails?
Kangaroo tails are candlestick patterns that can be used to signal a potential reversal in the market. They are so named because they look like the tail of a kangaroo.
There are three main characteristics of a kangaroo tail:
1. The open and close of the candlestick are both inside the previous candle.
2. There is room to the left of the candlestick (known as wicks or shadows).
3. The very next candle creates a new high or new low.
How to Recognize Forex Kangaroo Tails?
There are three main steps that you need to follow in order to recognize a kangaroo tail:
1. Look at the open and close of the candlestick.
A bearish kangaroo tail will have its open and close in the bottom third of the candle. A bullish kangaroo tail will have its open and close in the top third of the candle. You can use your eyes to gauge whether or not this rule has been fulfilled. Alternatively, you can use a trading tool such as a ruler or Fibonacci to measure the length of the candle relative to its open and close price.
2. See if there is room to the left of the candlestick.
The second step is to see if there is any wick or shadow to the left of the candlestick. This step is important because it helps to confirm that the market has indeed reversed. If there is no wick or shadow, then it is possible that the market has not yet reversed and that the kangaroo tail is simply a false signal.
3. Check whether the open and close are inside the previous candle.
This step helps to confirm that the kangaroo tail is indeed a reversal pattern. If the open and close are not inside the previous candle, then it is possible that the market has not yet reversed. At the same time, the opening and closing of the kangaroo tail must be higher than the low of the previous candle. Otherwise, it could simply be a bearish engulfing pattern.
4. The very next candle should create a new high or new low.
The fourth and final step is to check the very next candle after the kangaroo tail has formed. This step is important because it helps to confirm that the market has indeed reversed. This can be viewed as a continuation of the third step. The new high or new low doesn’t have to be significant, but it should at least be above the high of the kangaroo tail (for a bullish reversal) or below the low of the kangaroo tail (for a bearish reversal).
Different Ways to Trade in Forex With Kangaroo Tail Patterns
There are many different ways that you can trade forex with kangaroo tail patterns. Here are just a few examples:
1. Trade the Kangaroo tail with Fibonacci
If you see a kangaroo tail pattern forming at a Fibonacci level, then this is a good indication that the market may reverse. Fibonacci levels are important support and resistance levels, so if the market reverses at these levels, it is likely to continue in that direction.
2. Trade the Kangaroo tail with Support and Resistance
Another way to trade forex with kangaroo tail patterns is to look for them at important support and resistance levels. If the market is trading near a major support or resistance level and you see a kangaroo tail pattern forming, then this is a good indication that the market may reverse.
3. Trade the Kangaroo tail with Indicators
There are many different indicators that you can use to trade forex with kangaroo tail patterns. Some of the more popular indicators include the moving average convergence divergence (MACD) indicator, the relative strength index (RSI) indicator, and the stochastic oscillator.
Factors to Consider in Trading With Kangaroo Tails?
When trading with kangaroo tails, there are a few factors that you need to consider:
1. The Length of the Tail
The length of the kangaroo tail is an important factor to consider because it can give you an indication of how strong the reversal is likely to be. A longer kangaroo tail is generally more significant than a shorter one.
2. The Location of the Tail
Another factor to consider is the location of the kangaroo tail. If the tail is located at an important support or resistance level, then this is a good indication that the market may reverse.
3. The Volume
The volume is also an important factor to consider when trading with kangaroo tails. If the volume is increasing as the kangaroo tail forms, then this is a good indication that the market may reverse.
Tips and Tricks to Remember From Forex Kangaroo Tails
Here are some tips and tricks to remember from forex kangaroo tails:
1. Wait for a confirmation
One of the most important things to remember is to wait for confirmation before entering a trade. A confirmation can be in the form of a third candle forming or the market making a new high or new low.
2. Look out for confluence
When trading with kangaroo tails, it is important to look out for confluence. This means that there are multiple factors indicating that the market may reverse. For example, if you see a kangaroo tail forming at key price levels, then this is a good indication that the market may reverse.
3. Set Stop loss and take profit
Another important thing to remember is to set stop loss and take profit levels. This will help you to minimize your losses and maximize your profits.
Kangaroo tails are a powerful tool that you can use to trade forex. By following the tips and tricks mentioned above, you can increase your chances of success in trading with kangaroo tail patterns.
Check out Decode Global in order to learn more about kangaroo tails
Now that you understand how kangaroo tails work, you can sign up on a forex trading platform and start trading them today. Decode Global offers you demo and live accounts to take your trading to the next level. Signup today.