The Japanese Candlestick Tail

Meir Barak |

The tail of a Japanese Candlestick, also known as the shadow, indicates a change in the power balance between buyers and sellers. To understand how the tail is formed, let’s look at the chart below, showing a day of Apple, Inc. ($AAPL) intraday behavior.

AAPL Fifteen-Minute Candles

AAPL-tail1

AAPL_Tail.jpg

Based on its light color, candle [1] indicates a rise in price: in other words, the stock’s closing price is higher than its opening price. But a price rise does not disclose the full story. This candle has more to tell us: it also has a long topping tail.

What does the tail signify? As already noted, the tail indicates the stock’s peak price in the fifteen-minute timeframe represented by the candle. At some point during those fifteen minutes, the stock price reached the high of the tail, and buyers were in full control. The tail also indicates that buyers did not manage to maintain that high price. In fact, the tail actually shows that sellers took over control of the stock! We see that the length of the tail is almost the full length of the entire candle. Conclusion: there is a high probability of price reversal, i.e. a drop in price, as indicated in the candles that follow [1].

Now, to understand the meaning of the tail even better, let’s spread that fifteen-minute interval between 15:15 and 15:30 into candles of one-minute long, and examine what really happened more closely.

AAPL One-Minute Candles

AAPL_Tail___II.jpg

AAPL-tail2

Here, the power struggle is more clearly seen. We see a constant, strong increase of clear candles indicating buyer control, and then a sequence of black candles indicating that sellers have taken control. Although, at the end of the fifteen-minute interval, the stock price rose, the tail’s formation shows a shift in control, and therefore an anticipated change in direction of the stock’s price. In the previous chart, you can see that this is exactly what happened.

Does the color of the candle have meaning relative to the tail? In the fifteen-minute AAPL chart, the candle is clear: it indicates a rise in price. If it were dark, indicating a drop in price, then the tail would even more strongly imply change of control.

A topping tail indicates that sellers have taken control. The longer the tail, the stronger and clearer the control. The candle color makes no difference.

A bottoming tail indicates an expected upward reversal. Here, too, the position of the candle with the tail within the formation of candles provides the tail with its significance. A long tail pointing down reminds us that there used to be complete seller control, but control has now been taken by the buyers.

To learn more about the stock market and to begin your own journey toward financial independence, visit Meir Barak's site Tradenet and check out his book "The Market Whisperer." 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
AAPL Apple Inc. 109.69 -0.26 -0.24 11,108,958

Comments

Emerging Growth

Taranis Resources Inc.

Taranis Resources Inc is an exploration stage company. The Company along with its subsidiaries is engaged in the acquisition and exploration of mineral properties. Its projects include Thor Property in…

Private Markets

Ozobot by Evollve Inc

Ozobot is a world leader in compact super intelligent robots that entertain and educate through fun interactive gaming.

XY Find It

Founded by serial entrepreneur Arie Trouw, XY Findables follows a single guiding principle: customers should never lose anything important again. With over 50,000 users around the world, more than 100,000…