A single candlestick pattern, as the name implies, is made by one candle. As you can see, the trading signal is generated from 1 day of trading activity. The candlestick pattern's trader can gain effective profits if the pattern is correctly identified and executed.
When trading on candlestick patterns, one must pay attention to the length. The candle's length indicates the range of the day. The candle's length indicates the intensity of the selling or buying activity. It is possible to conclude that trading activity was quiet if the candles are shorter.
The following image shows a view of the short/long - bullish and bearish candles.
Trades must be qualified based on the length of the candle. Trading on short candles should be avoided. This perspective will be rediscovered as we study specific patterns.
We will be able to understand the Marubozu as our first single candlestick design. Marubozu is Japanese for "Bald". Soon, we will be able to understand the context. There are two types marubozu: the bullish marubozu or the bearish marubozu.
Let's first outline the three most important rules regarding candlesticks before we move on. It was discussed in the previous chapter. I have reproduced it for your quick reference.
Marubozu is the most common candlestick pattern to violate rule number 3. This means that you cannot look for a prior trend. Marubozu may appear in any chart, regardless of the prior trends. The trading implications remain the same.
Marubozu is a candlestick that has no upper or lower shadow. This makes it appear bold. As shown below, a Marubozu is just the body. There are exceptions to this rule. These exceptions will be investigated shortly.
The red candle is the bearish marubozu and the blue the bullish marubozu.
If there is an absence in a Bullish Marubouz upper and lower shadows it simply conveys that the open is equal to the low and high equals the close. Therefore, whenever the close = Open = Low or High =A bullish marubozu is created.
The Bullish marubozu implies that theh interest for the buying of stock was so high that the participants wished to buy it at any price during the day. every day the stock closes at its High point. The stock's sentiment is bullish, regardless of the previous trend.
It is expected that this sudden shift in sentiment will lead to a surge in bullishness and this bullish sentiment should continue for the next few trading sessions. A trader should consider buying opportunities when a bullish marubozu occurs. TheBuy priceShould be approximately the closing price for the marubozu
The bullish marubozu is the encircled candle in the chart (ACC Limited). The bullish marubozu candle doesn't have a visible upper or lower shadow. Open = 971.8; High = 1030.2; Low = 970.1; Close = 1028.
Take a look at the textbook definition for marubozuOpen = Low, High = Close. In reality, however, this definition is slightly different. In percentage terms, the price variation is very small. For example, the difference between high and close is only 1.8. This is just 0.1% of high. Here is where the 2 nd rule comes in - Be flexible and Quantify.
The expectation of a marubozu has changed to bullish and one would therefore be a buyer. This would result in the following trade setup:
Stoploss = 9700.0 and Buy Price = 1028.4
It is obvious that candlestick patterns don't give us a target. We will discuss the topic of setting targets in a later part of this module.
When do we buy the stock after making the decision to buy it? Your risk appetite will determine the answer. Let's assume that there are two types of trader: the risk-taker or the risk-averse.
The risk-taker stock would be bought on the same day that the marubozu is formed. The trader must validate that a marubozu has occurred. Validating is quite simple. Indian markets close at 3:30 PM. At 3:20 PM, one should check to see if there are any changes in the Indian markets. The current market price (CMP), is roughly equal to the highest price for the day. The opening price for the day is approximately the same as the lowest price for the day.. If you are satisfied with this condition, the day is forming an marubozu. You can then buy the stock at the closing price. Importantly, it is important to remember that the risk-taker buys on a bullish/blue day and follows rule 1. This means selling on weakness and buying on strength.
The risk-averse stock would be bought by a trader the following day, i.e. The day following the formation of the pattern. To comply with rule 1, ensure that the day after the pattern has been formed is bullish before you buy the trader. The risk-averse buyer may only buy the stock at the end of the day. However, buying stock the next day has the disadvantage that the buy price is much higher than the suggested buy price and the stop loss is very deep. After confirming that the Bullishness has been taken place,As a tradeoff the risky trader buys.
According to the ACC chart, both risk-takers and risk-averse traders would have been successful in their trades.
Another example is Asian Paints Ltd. Here, both the risk-taking trader and the risk-averse one would have been successful.
Here's an example of where risk-averse traders would have gained:
The chart above shows that a bullish marubozu is enclosed. Risk-takers would have opened a trade to purchase the stock the day after the close. However, they would be able to lose the following day. The risk-averse would not have bought the stock if the next day was a red candle day. The rule states that we should only buy on a blue day and sell on red day.
What happens if the market changes its direction after you buy? Does the trade go wrong? As I mentioned, candlestick patterns have an inherent risk management mechanism. If the bullish marubozu is used as a stoploss, the stock's low acts as an entry point. If the market moves in the opposite direction after you have initiated a buy order, exit the stock immediately if the price breaches the marubozu.
Let's take an examplein which the bullish marubozu buys for risk-averse also the risk-taker.
The OHLC is based on O = 960.2 and H = 988.6, C = 988.5, L = 959.85, and C = 958.85.
The pattern failed and one would have lost. This trade's stoploss would be the low marubozu (i.e. 959.85
It is part of trading. Even the most experienced trader will have to go through this. The best thing about following the candlestick is the fact that losses can't go on indefinitely. If the trade moves in the opposite direction, there is an established price at which one must exit the trade. As the stock continued to fall, it would have been prudent to book a loss.
There could be situations where the stoploss is activated and you have to pull out. However, the stock may reverse direction and begin going up after you pull out of the trade. This is part of the game and it's not something you can avoid. The trader must adhere to the rules, no matter what happens. And no excuses allowed to disrespect them.
Bearish Marubozu indicates extreme bearishness. The open here is equal to the highest and the close is equal to the lowest. Close = Low, Open = High.
Marubozu is bearish and implies that stock prices are so high during the day that selling pressure is too high that during the day participants sold at every price point occurring in the same day so many times so the stock closes at its low of the day. Irrespective of the prior trends,the marubouz day action conveys that there is a change in sentiments and the stock is Bearish then.
This sudden shift in sentiment is expected to continue over the next few trading session. Therefore, one should consider shorting opportunities. The closing price of the marubozu should be the selling price.
The chart (BPCL Limited) shows that the encircled candle signifies the presence of a bearish maruzu. The candle doesn't have an upper or lower shadow. Here are the OHLC data:
Open = 355.4; High = 356.0; Low = 341, Close = 341
As we already talked , a little change in OHLC figures that leads to lower shadows and small upper is fine up to a decent limit.
Trades on the bearish marubozu include shorting BPCL at 341.7 and a stoploss at high candle. In this instance, the stoploss price would be 356.0. We haven't yet dealt with setting targets at the stage. The same will be defined in modules.
Keep in mind this: Once you initiate a trade, you need to keep it open until the target is reached or the stoploss is exceeded. Your trade may go bust if you try to do anything else before one of these events occurs.It's critical to hold to the plan.
The risk appetite of the individual can determine whether trades are initiated. A risk-taker may initiate a short trade the day after the close. He must ensure that the candle does not form a bearish marubozu. The trader must verify that the open price is at least equal to the high price and that the market price is equal to or less than the high price. If this condition is confirmed, then a bearish marubozu can be established.
If the trader is cautious about taking on risk, he may wait until the closing of the next day. After ensuring that the day's red candle day is met, the short trade will be completed by 3:20 pm next day. This is to make sure that we adhere to 1 st rule: Buy strength and Sell weakness.
The BPCL chart shows that both risk-averse and risk-taker would have been financially successful.
Another chart is Cipla Limited. Here you can see how the bearish marubozu was profitable for both risk-averse traders and risk-taker trader. These are short-term trades so one must be quick to book profits.
This chart shows a bearish marubozu trend that would not have worked for the risk-taker. However, a risk-averse trader could have avoided initiating this trade thanks to rule 1.
We discussed the length of the candle earlier in this chapter. Avoid trading in a short candle (below 10%) or in a long candle (below 1%).
A small candle can indicate subdued activity in trading and it is difficult to determine the trade's direction. A long candle, on the other hand, indicates intense activity. A long candle would indicate extreme activity. The penalty for not paying the stoploss in the event of a trade going wrong would be severe. You should not trade on candles that are too long or too short.