Learn to Trade Forex Kangaroo Tails in 10 Minutes [Bonus Template]

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This post covers the following:

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What Is a Forex Kangaroo Tail?

The kangaroo tail is a price pattern consisting of one candlestick. It was popularized by Walter Peters in his book, Naked Forex, and you can use it to spot market reversals.

In terms of appearance, the kangaroo tail has a small body and a long wick. Naturally, there’s a bullish and bearish version and both have an open and close near the extreme.

You might notice that kangaroo tails are very similar to Pin bars. However, there are specific rules and characteristics you must consider when dealing with these patterns.

Every kangaroo tail is a pin bar, but not every pin bar is a kangaroo tail, if you like.

So, let’s dig deeper.

How to Identify Kangaroo Tails

The first step is to look at the open and close of the candlestick.

A valid kangaroo tail will have both its open and close in the top or bottom third of the candle, depending on whether you have a bullish or bearish version.

Often, you can use your eyes and tell whether or not this rule has been fulfilled. Whenever you are in doubt, you can apply the Fibonacci retracements and use the grid as a way of measuring the candle.

The second step is to see if there is room to the left.

The ideal forex kangaroo tail doesn’t have a lot of price action to its left. This is because kangaroo tails are reversal signals and whenever there is a lot of room to the left, you are dealing with a possibly overextended trend.

In addition, extreme reversals tend to happen in areas that have not seen price action in a long time. This is the reversal that will allow you to capture large moves in the market.

The third step is to check whether the open and the close are inside the previous candle.

In other words, the previous candle must have a high that is higher than the open and close of the kangaroo tail. At the same time, the open and close of the kangaroo tail must be higher than the low of the previous candle.

If a kangaroo tail is too far from recent price action, it may suggest a sudden increase in the trend’s intensity, which is obviously not an ideal situation for trading reversals.

The fourth and last step is that the very next candle should create a new high or new low.

This is the trade trigger.

(All of these key points are contained within our forex kangaroo tail template, so if you already haven’t, make sure you download your copy for free.)

How to Trade Using the Kangaroo Tail Forex Price Pattern

Usually, forex kangaroo tails are traded on the daily or weekly charts using pending orders.

You must look for kangaroo tails that appear on a support or resistance zone. The candlestick must penetrate and, ideally, go beyond the zone. The best set-up occurs when the head is on one side of the zone and the tail is on the other.

This suggests that the market has gone too far into a zone and that it might reverse as it repeatedly did in the past. On the other hand, a short tail may suggest that the zone simply slowed down the market, but it might break through after a small consolidation.

For the bullish kangaroo tail, you can place a buy stop a few pips above the high of the candle. For the bearish kangaroo tail, you can place a sell stop a few pips below the low of the candle.

In both cases, the trade entry is delayed until the market moves in the expected direction.

Remember that the last step of the kangaroo tail set-up is to wait for a candle that creates a new high or low. As the market pushes through the high or low of the kangaroo tail, the set-up is completed, and the pending order automatically opens the trade even if you’re away from the computer.

Nothing particularly complicated here.

Intuitively, the other side of the tail offers a great place for your stop loss. Just make sure you place the stop a few pips beyond the high or low.

According to Walter, instead of waiting for the market to hit your stop loss in case of a losing trade, you should manually close out losing trades if they moved 75% toward the stop loss. This should reduce the size of your average loss.

What about profits? There are many ways you can exit the kangaroo tail trade with a profit. Probably the simplest is to place a take profit order at the nearest support or resistance zone.

Now, there is an “advanced” way of trading kangaroo tails.

Let’s take a look at that.

Advanced Entry Technique

If you prefer having larger wins less frequently as opposed to having smaller wins more frequently, you can experiment with the following entry method:

Instead of placing a pending order above or below the extreme of the kangaroo tail, place an order to about the same area where the extreme point of the previous candle lies.

This method was presented in a webinar, but since then it has been uploaded to YouTube.

(Go to 20:30)

What happens is that you basically expect a market symmetry by procrastinating that the next candle will retrace into the kangaroo tail about as far as the previous one did.

By doing so, you significantly cut the stop distance and improve your risk-reward ratio. While you’ll be stopped out more often, the larger wins will offset the lower win rate.

The Busted Kangaroo Tail

The busted kangaroo tail is a kangaroo tail that has failed. Therefore, it offers the opportunity of a breakout trade.

Remember that you must trade only those trade kangaroo tails that appear at support or resistance levels. When the market doesn’t trigger an entry on your kangaroo tail trade, it keeps moving in the trend direction instead of beginning to reverse.

When the movement is strong enough to break through the support or resistance zone (that is, the market reaches the level that would have been your stop on the kangaroo tail trade), you can open a trade in the direction of the trend.

Walter talks about the busted kangaroo tail trade in the same video we mentioned above. (Go to 35:00)

Tips and Tricks for Trading Forex Kangaroo Tails

In this last section, we take a look at some tips and tricks regarding forex kangaroo tails.

Beware of the Asian Session

In the Truth About FX podcast, Walter talks about something called the Asian Drift.

The Asian Drift is a perceived tendency for markets to tend to move in the “wrong direction” during the Asian Session.

“What I’ve found, what my students have found, probably many of you have tested this and have found — is that you do not really want to take a trade during Asia.”

What that means for kangaroo tails is that if the new low or new high after the kangaroo tail is made during the Asian session, you might consider rejecting the trade.

Be Careful with Kangaroo Tails Around Giant Candlesticks

When the candlesticks before the kangaroo tail are large candles in the direction of the trend, the likelihood is higher that the trend will continue.

In these situations, kangaroo tails often form as some traders close their positions for profit following the large move.

This causes a temporary retracement in the trend, which many traders will see as an opportunity to jump on the trend, further fueling its growth.

Sometimes It’s Better to Look for Busted Kangaroo Tails

Whenever the market touches a zone multiple times in quick succession, there is a higher possibility of a breakout and you should consider rejecting the kangaroo tail trade.

This is especially true if some of the preceding candles are huge candles pointing in the trend direction.

In this situation, preparing for a busted kangaroo tail trade can be a good idea.

Conclusion

If you want to be among the forex traders who can profitably trade price action, it would be in your best interest to learn as much as possible about the forex kangaroo tail and similar patterns.

There is more to forex than fancy indicators. If you want to read the subtle signs that the market is sending to you, it’s not a question of how to do so.

Naked trading will put you in a position for success. There are several price action techniques, from chart patterns to candlesticks and more. The trick is learning how to put everything together into a great system.

We encourage you to read the Naked Forex book from Walter Peters. It contains more amazing trading methods you will find useful even if you don’t want to completely eliminate indicators from your trading.

Furthermore, read our guide on developing a trading plan.