Single candlestick means one candle. With this kind of pattern, the trading signal is based on a single day’s data. When identified and implemented correctly, these trades can be highly rewarding.
When trading based on candlestick patterns, one needs to consider the range of the day indicated by the length. Generally, a longer candle implies greater buying or selling activity, while shorter candles suggest lesser activity.
Trades must be judged according to candle length. Short candles that appear dull should be steered clear of, but we will gain an appreciation for them when we begin understanding trading patterns.
The Marubozu is the first single candlestick pattern to be discussed and is named after a Japanese term meaning “bald”. There are two variations of this pattern; the bullish Marubozu, and the bearish Marubozu. Our understanding of this terminology will soon become clear.
Before continuing, let us set out the three most significant rules regarding candlesticks. We covered it in the preceding chapter; I have included a copy here for quick reference:
-Buy strength and sell weakness
-Be flexible with patterns (verify and quantify)
-Look for the prior trend.
Marubozu is a unique candlestick pattern which does not abide by the third rule of looking for a prior trend appearing in any part of a chart; however, its interpretation remains constant.
The textbook defines Marubozu as a candlestick with no upper or lower shadow, leaving it without any “hair” so to say. The Marubozu usually only comprises the real body, which is demonstrated in the image below. There are certain exceptions to this rule, which we shall analyze shortly.
The red candle symbolizes a bearish marubozu, while the blue one alludes to a bullish marubozu.
The lack of the upper and lower shadow in a bullish marubozu means that the low is equal to the open, and the high is equal to the close. Hence whenever the Open = Low and High = close, a bullish marubozu is formed.
A bullish marubozu reflects strong buying interest in a stock, indicating that the market participants purchased shares at every price available throughout the day, resulting in close proximity to the day’s peak. This suggests a shift in sentiment and an indication of a bullish surge.
It is anticipated that this sudden shift in sentiment will trigger a burst of bullishness and remain for the upcoming trades. As such, a trader should consider buying at the marubozu’s ending price.
The textbook definition of a marubozu is Open = Low, and High = Close. However, in reality, that may not be entirely accurate. In most cases, the difference between the high and close is slight, such as 1.8 out of a total high or 0.17%. Thus, it’s important to be flexible with this rule and use quantitative analysis to verify your results.
This bullish sentiment has led to the expectation of buying the stock. Trade setup for this is:
Buy Price = Around 1028.4 and Stoploss = 970.0
It is clear that candlestick patterns do not provide us with a target. Nevertheless, we will go into more detail regarding setting targets further on in this module.
Once deciding to commit to the purchase of stock, when to actually buy it is determined by one’s risk tolerance. We can assume two different levels of traders – those who are more daring and those who play it safe.
The risk taker would purchase the stock when a marubozu chart is forming, usually indicated when Indian markets close around 3:30 PM. To validate, verify if the Current Market Price (CMP) is approximately equal to the high price of that day and the opening price equals the low. If so, buying at or near closing prices is advised, following rule 1 which states “buying on strength and selling on weakness”.
The risk-averse trader would purchase the stock on the following day, once the pattern has been formed. As a precautionary measure, it is recommended that a bullish trend has to be established throughout the day prior to making this investment.
Buying in this way must take place at the close of trading to ensure rule number 1 is adhered to. However, bear in mind that by doing so, the buy price is likely to be higher than intended and the stoploss deeper. Nonetheless, this trade-off allows for double confirmation of a promising uptrend.
According to the ACC chart above, traders who took risks and those who were more conservative both saw success in their investments.