Trade Lesson: Understanding Bottoming And Topping Tails
Most traders do not put all the pieces of the puzzle together when learning and using technical analysis. Let's talk about topping and bottoming tails. Simply put, a bottoming tail is a bullish signal and a topping tail is bearish. A bottoming tail MUST occur at the lows of a chart. This means that no point on the chart in recent history can be lower. Next, the tail must be substantial, not just a little thing barely seen by the eye. Additionally, the close of the candle must be in the upper 25% when measuring from the lows to the highs. If all these factors match up, you may have a bottoming tail. The same things apply for a topping tail.
Now to throw in the one key that most traders miss and costs them money. To truly keep your winning odds at 90% or better, you must also factor in the market. The below chart is of Corinthian Colleges, Inc. (NASDAQ:COCO) . You can see, a great bottoming tail formed based on all factors mentioned above. However, one factor would keep Chief Market Strategists away from this trade for now. While the stock had a great recovery, it still closed lower. That would not matter if the market for the trading day was flat or lower as well. However, the U.S. stock markets rallied 3-4% the day before. The fact that this still could not end the day higher tells us to give it a little time and then re-evaluate the trade.
Always look at the trading day in the markets and match it up to the stock chart. Too many traders see a pattern and ignore the macro action on the markets. If you want to be a complete trader, start with the micro view of the stock, then expand your view to the macro market. If all things align, a 90% success rate trade will be your reward.