Understand Candlestick Patterns
Today most of the technical analysts use candle stick chart to identify the short term trades. As each candle has its own significance and traders can easily understand the demand-supply dynamics that leads to rise or fall of a stock.
To identify a profitable trade, one needs to have a knowledge of candle stick patterns and logic behind the formation of these patterns. In this section, we will introduce you with different patterns that are available in candle stick charts. These patterns are divided into single candle stick patterns and multiple candle stick patterns.
Under single candle stick Patterns, we will learn the following candle stick formations:
- Marubozu includes both bullish and bearish marubozu.
- Spinning tops.
- Paper umbrella includes hammer and hanging man.
- Shooting star.
Under multiple candle stick Patterns, we will learn the following candle stick formations:
- Engulfing pattern including bullish and bearish engulfing pattern.
- Harami including bullish and bearish harami.
- Piercing pattern.
- Dark cloud cover.
- Morning Star.
- Evening Star.
There are many more patterns but we are covering most important patterns in this course. All these patterns helps to identify the short term trading opportunities. In this article you will learn the Marubozu pattern.
Introduction to Marubozu
Marubozu means ” Bald” in Japanese language. This is the name given to a candle that has no wick/shadow and high trading range from normal. To understand this definition , have a look the chart.
This is a candle stick chart of an Asian paint stock forming a bullish marubozu at the bottom of the chart. The pattern has almost very small shadow (little bit deviation from text book definition of no shadow is acceptable) and high trading range from the most of the candles. To qualify a marubozu the stock must meet the following criteria:
For Bullish Marubozu, Open Price= Low Price and Close Price= High Price. Along with this, the candle must be a high trading range from most of the candles. The color of the candle is green as closing price is greater than opening price.
For Bearish Marubozu, Open Price = High Price and Close Price= Low Price. Along with this, the candle must be a high trading range from most of the candles. The color of the candle is red as opening price is greater than closing price.
In Asian Paint stock example, the marubozu candle has a Opening price =Rs 1446.55, Low Price = Rs 1446, High Price= Rs 1605.35 and Close Price= Rs 1593.15. This means that Open Price= Low Price and High Price is almost equal to Close Price. A little bit deviation is acceptable as here the close is near the day’s high. The range of the day is Rs 158.8 ( High Price- Low Price) which is above normal range from most of the candles. This candle qualifies for bullish marubozu pattern.
Important note: We have to be little bit flexible to the text book definition of each pattern. It is difficult to find the exact pattern each time in real world but difference must be very less.
Let us now take an example of bearish marubozu candle was formed in JSW Steel candle stick chart on 24.02.2020.
In this example, the marubozu candle is formed with opening price= Rs 277.95, high price= Rs 277.95, Low Price= Rs 256 and close price = Rs 258.95. The stock has equal opening price and high price. Also the low price is almost equal to close price (little bit deviation from text book definition of no shadow is acceptable). The candle has high trading range from normal. It qualifies as bearish marubozu candle. The color of the candle is red.
Significance of this Candle Stick pattern
This pattern has a potential to reverse the direction of the trend. If it forms in downtrend the stock can start an upward movement in case bullish marubozu emerges on the stock. Have a look on Asian Paint candle stick chart:
Asian paint stock was in downward trend as stock was falling sharply. At the bottom of the chart, bullish marubozu pattern emerges on the stock and the stock reverses the direction. There after the stock moves upward. You will be thinking why the stock start moving upward?
A Bullish Marubozu candle is formed when the market participants were willing to buy the stock at each level during the day. Since beginning of trading day strong buying emerges on the stock resulting in rising price of the stock and the share closes near or at day’s high. Also the candle formed will have high trading range. The candle has a large size and green in color.
It does not matter where it forms either at reversal or in continuation of trend. Whenever it emerges that means the stock has potential to move upside for next few trading days. Stop loss for this pattern is the lowest price of this candle.
Now have a look on Aurobindo Pharma candle stick chart, a bullish Marubozu formed in uptrend and stock pick pace.
This pattern has a similar power to reverse uptrend and stock can start falling. Lets understand with the help of Nifty chart.
Nifty has been in uptrend till bearish marubozu emerges on the stock resulting in sharp fall. On this day, Nifty hits all time high of 12430.50 (20.01.2020) and ten days later nifty hit a low of 11614.50 (03.02.2020).
You will be thinking that how this has happened?
A Bearish Marubozu candle is formed when the market participants were willing to sell the stock at each level during the day. Since beginning of trading day strong selling emerges on the stock resulting in falling price of the stock and the share closes near or at day’s low. Also the candle formed will have high trading range. The candle has a large size and red in color.
It does not matter where it forms either at reversal or in continuation of trend. Whenever it emerges that means the stock has potential to move downside for next few trading days. Stop loss for this pattern is the highest price of this candle.
Now have a look on Bank Nifty candle stick chart, a bearish Marubozu formed in downtrend and stock pick pace.
The Bank Nifty has formed a bearish Marubozu in already downward trend and stock continues to fall at a rapid pace.