This first thing that comes to one’s mind if asked about technical analysis is candlesticks. Candlesticks form the base for all forms of technical analysis. Be it, indicator traders, price action traders, or any other type of traders, the majority of them analyze the market using candlesticks. Therefore, it is vital to understand the concept of candlestick trading.
Candlesticks patterns and its significance
After a thorough analysis of the candlesticks, trading researchers have come up with the different patterns in candlesticks which help traders indicate the market’s upcoming move. The patterns can either be a single candle or a group of candles. There are numerous candlestick patterns in the industry. However, understanding when a candlestick pattern will work and when not, is quite challenging.
The answer to this question can be answered if we approach it the Price Action way.
Single candlestick pattern
As the name suggests, this type of pattern is formed by just one candle, and usually analysed on the daily timeframe.
A daily candle represents one day of market activity. Now that we know what a single candlestick is let’s go ahead and understand how to read it accurately.
The Marubozu candlestick pattern
Marubozu is a Japanese-derived word which means “Bald.” This is a candlestick figure that indicates a buy or sell signal. There are two types of Marubozu; the bullish Marubozu, which indicates a bullish market, and the bearish Marubozu, which indicates a bearish market.
How does the Marubozu candlestick pattern look like?
Below is the representation of the Marubozu candlestick pattern
As it can be observed from the figure above, a Marubozu is a candle with no wicks on the top and bottom of it. In other words, a Marubozu is just the body of the candle. The green candle represents a Bullish Marubozu, and the red candle represents a Bearish Marubozu.
A Bullish Marubozu is formed when the open happens at the Low and its Close at the High. In an elaborated way, the price never went lower than the open price, and also closed at the high point of the day, which means the price did not come down after touching the high price.
The Bullish Marubozu indicates that the buyers were so much interested in buying the security that they were willing to buy it at every price the market offered. So, as the price was rising buyers continued to buy. They even bought it at the highest price of the day, which is the reason the market closed at the high of the session. This clearly suggests that the buyers are strong and active at the moment, and the market sentiment is currently bullish. Therefore, there is a high probability that the bullish sentiment will continue further for a few more trading sessions.
Let us understand how to take a trade using this pattern.
Below is the chart of NZD/CHF on the Daily timeframe. The encircled candle in the chart shows a Bullish Marubozu. Knowing that the market is showing bullishness, we could say that there was a high likelihood for the market to head up north. Therefore, we could have pulled the trigger for a buy. And, as far as the result of the trade is concerned, we can see that the market was bullish for the next five trading sessions.
Before entering, the trader must do a validity check. The validity check is as follows:
- The opening price must be equal to low price
- The current market price must be very close to the high price of the day
As the aggressive trader is entering before the close of the candle, it is necessary to validate the above two criteria.
On the other hand, a conservative trader can enter for a buy the next day’s open. The stop loss can be kept below the low price. Entering the trade after the next candle’s open gives the trader a double confirmation that the bullish has established in the market. However, the drawback is that you will be entering a little late, possibly resulting in a wider stop loss and a lower risk to reward ratio.
Doing it the Price Action way
Well, this is taught everywhere on the internet. Does anyone teach when this strategy will work and when will it not work? Well, let us answer that question with the assistance of price action.
The Marubozu pattern will only work if the story prior to its occurrence is indicating the same direction as the Marubozu is indicating. That is, if the story is indicating a buy and the Bullish Marubozu is also indicating a buy, the pattern will definitely work.
Analyzing the story
If we look at the chart with a bird’s eye perspective, we can clearly see that the market is ranging. Also, the price broke below the range and came right back into the range with a Bullish Marubozu. Since the price came back into the range and it is now at the support, it indicates that the market will go up. On the other hand, the appearance of bullish Marubozu also indicates an upcoming bullish market as well. Therefore, now we can trigger a buy with much more confidence.
A Bearish Marubozu indicates bearishness in the market. In a Bearish Marubozu pattern, the price opens at the High and closes at the Low.
A Bearish Marubozu indicates that the market is experiencing selling pressure. It also indicates that the market participants are willing to sell it at every price the market shows during the day. This is the reason for the price to close at the Low of the day. Therefore, we can conclude that the market sentiment is currently bearish, and that bearishness could continue for a few trading days.
Below is the chart of AUD/CAD on the Daily timeframe. A Bearish Marubozu candle is formed as represented within the circle marked. This indicates that the seller pressure is coming in, and the market is preparing to go down. Therefore, we can anticipate going short around the low price of the day.
Similar to the above example, the entry entirely depends on the type of trader you are. An aggressive trader may enter for a sell while the candle is still being formed, and a conservative trader waits to go short till next trading session. The stop loss for both will be the same, i.e., above the high price of the Marubozu’s day.
Doing it the Price Action way
Here in this example, we can clearly see that the price broke the Support & Resistance line (1) indicating that we are in a downtrend. Afterwards, the market pulls back and then again breaks the S&R (2). If you observe carefully, the candle that breaks the S&R line is a Bearish Marubozu candle.
Here, the story is indicating a downtrend continuation and the Bearish Marubozu is also indicating that the market is going to drop. Therefore, as both – the story and the pattern are in sync, we can anticipate going short on this one.
Note: It is not necessary for the low price and the close price to be exactly equal. There can be a slight variation in the prices. However, it must be within a reasonable limit. Also, the same idea holds true in relation to the Open and the High as well.
Downsides of the Marubozu candlestick pattern
- You must have observed that we have not discussed the target or take profit points. It is because; there are no specific target points to place when trading with this pattern.
- Also, if the Marubozu candle is significantly long, the stop loss becomes an issue, because it would be hard to find good reward-to-risk ratios.
Apply this technique the next time you see a Marubozu candlestick on your charts. Found this information useful? Please let us know in the comments section below. Happy trading!