Marubozu Candlestick Setting Stop Loss The Ultimate Guide to Trading Patterns

The Stop loss on Bullish Marubozu

In case you find yourself in a situation where the markets have reversed after you purchased the stock, bear in mind that candlestick patterns come with an inherent risk management system. 

As mentioned previously, for bullish marubozu formations, the low of the stock serves as a stop loss. Thus, if the price breaches this level, it is best to exit your position.

This is an instance where the bullish marubozu could be considered a positive signal both for conservative and aggressive investors. The OHLC is : O = 960.2, H = 988.6, L = 959.85, C = 988.5.

But the pattern eventually disappointed and resulted in loss. Consequently, the stoploss for this trade was 959.85 – the low of the marubozu.

Booking a loss may be part of the trade, even for an experienced trader. The advantage of candlestick trading is that losses aren’t permanent; there is an idea of when to step out of the trade if it starts to take a turn. 

In this case, taking a loss was the best move to make before the stock decreased in value further.

Certainly, there may be times when the stop loss activates and you exit the trade. It is possible that the stock could move in an upward trend afterwards. This is a part of trading and there’s not much that can be done. 

The key here is to always stay disciplined and follow the rules, no matter what.

Bearish Marubozu

The Bearish Marubozu reflects utmost bearishness; opening and closing prices are identical, with the open matching the high and low being equal to the close.

A bearish marubozu reveals the presence of considerable selling pressure in the stock, visible in its close near the day’s low point. Despite any prior trends, this action shows that sentiment has shifted and the stock is now bearish.

It is expected that this abrupt shift in sentiment will continue over the upcoming trading periods, presenting an opportunity to short. The selling price should be about the closing price of the marubozu.

This chart of BPCL Limited includes an encircled candle depicting a bearish marubozu. It is lacking both an upper and lower shadow, and the OHLC data for it is as follows:

The opening price was 355.4, the highest point it reached was 356.0, the lowest being 341, and the final value for the day was 341.7.

We discussed minor variations in the Open, High, Low and Close figures that lead to small upper and lower shadows, and agreed these were ok as long as within an acceptable limit.

A trade on the bearish marubozu would involve shorting BPCL at 341.7, with a stop loss at 356.0. We’ll discuss setting targets for this later in the module.

It is imperative to stay the course once a trade is initiated, seeing it through until either the target or stop loss kicks in. If you attempt something else first, your trade will likely fail. Therefore, it’s essential to follow the plan.

Based on their attitude to risk, traders can initiate a short position on the same day near the end of trading. To make sure it is valid, they should check that a bearish marubozu pattern has formed. 

This means confirming the open price is around the same as the high, and the current market price is roughly equal to the low. If so, then a short position can be taken.

For the risk-averse trader, the short trade should only go ahead the following day, once it can be confirmed that it is a red candle day. This ensures compliance with the initial principle: buying strength and selling weakness. The trade must be executed by 3:20 PM at the latest.

This chart depicts a bearish marubozu pattern, which would not have been a profitable investment for the risk-taker. A precautionary approach, however, may have saved the risk-averse trader from entering the trade due to rule 1.

The Trade Trap

In this chapter, the length of the candle was addressed. To optimise trading performance, one should steer clear of dealing in a narrow (below 1% range) or long candle (above 10% range).

A candle of small size is an indication of muted trading activity, thus it can be difficult to pinpoint the direction of the market. However, a long candle signals excessive action. The difficulty with these extended candles is determining where to set up the stop loss. 

If placed too high, in case the trade does not go as expected, there could be severe penalties to bear, and thus trading on either particularly brief or lengthy candles should be avoided altogether.