5.1 – Overview
As the name suggests, a single candlestick pattern is formed by just one candle. So as you can imagine, the trading signal is generated based on 1 day’s trading action. The trades based on a single candlestick pattern can be extremely profitable provided the pattern has been identified and executed correctly.
One needs to pay some attention to the length of the candle while trading based on candlestick patterns. The length signifies the range for the day. In general, the longer the candle, the more intense is the buying or selling activity. If the candles are short, it can be concluded that the trading action was subdued.
The following picture gives a perspective on the long/short – bullish, and bearish candle.
The trades have to be qualified based on the length of the candle as well. One should avoid trading based on subdued short candles. We will understand this perspective as and when we learn about specific patterns.
5.2 – The Marubozu
The Marubozu is the first single candlestick pattern that we will understand. The word Marubozu means “Bald” in Japanese. We will understand the context of the terminology soon. There are two types of marubozu – the bullish marubozu and the bearish marubozu.
Before we proceed, let us lay down the three important rules about candlesticks. We looked at it in the previous chapter; I’ve reproduced the same for quick reference:
- Buy strength and sell weakness.
- Be flexible with patterns (verify and quantify)
- Look for the prior trend.
Marubozu is probably the only candlestick pattern that violates rule number 3, i.e., looking for a prior trend. A Marubozu can appear anywhere in the chart irrespective of the prior trend; the trading implication remains the same.
The textbook defines Marubozu as a candlestick with no upper and lower shadow (therefore appearing bald). A Marubozu has just the real body, as shown below. However, there are exceptions to this. We will look into these exceptions shortly.
The red candle represents the bearish marubozu, and the blue represents the bullish marubozu.
5.3 – Bullish Marubozu
The absence of the upper and lower shadow in a bullish marubozu implies 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 indicates that there is so much buying interest in the stock that the market participants were willing to buy the stock at every price point during the day, so much so that the stock closed near its high point for the day. It does not matter what the prior trend has been, the action on the marubozu day suggests that the sentiment has changed and the stock is now bullish.
The expectation is that with this sudden change in sentiment, there is a surge of bullishness, and this bullish sentiment will continue over the next few trading sessions. Hence a trader should look at buying opportunities with the occurrence of a bullish marubozu. The buying price should be around the closing price of the marubozu.
In the chart above (ACC Limited), the encircled candle is a bullish marubozu. Notice the bullish marubozu candle does not have a visible upper and a lower shadow. The OHLC data for the candle is: Open = 971.8, High = 1030.2, Low = 970.1, Close = 1028.4
Please notice the textbook definition of a marubozu Open = Low, and High = Close. However, in reality, there is a minor variation to this definition. The price variation is not much when measured in percentage terms, for example, the variation between high and close is 1.8, which as a percentage of high is just 0.17%. This is where the 2nd rule applies – Be flexible, Quantify and Verify.
With this occurrence of a marubozu the expectation has turned bullish, and hence one would be a buyer of the stock. The trade setup for this would be as follows:
Buy Price = Around 1028.4 and Stoploss = 970.0
As it is evident, candlestick patterns do not give us a target. However, we will address the issue of setting targets at a later stage in this module.
Having decided to buy the stock, when do we actually buy the stock? The answer to this depends on your risk appetite. Let us assume two types of a trader with different risk profiles – the risk-taker and the risk-averse.
The risk-taker would buy the stock on the same day as the marubozu is being formed. However, the trader needs to validate the occurrence of a marubozu. Validating is quite simple. Indian markets close at 3:30 PM. So, around 3:20 PM one needs to check if the current market price (CMP) is approximately equal to the high price for the day, and the opening price of the day is approximately equal to the low price the day. If this condition is satisfied, you know the day is forming a marubozu, you can buy the stock around the closing price. It is also essential to note that the risk-taker is buying on a bullish/blue candle day, thereby following rule 1, i.e., buying on strength and selling on weakness.
The risk-averse trader would buy the stock on the next day, i.e. the day after the pattern has been formed. However, before buying the trader, ensure that the day is a bullish day to comply with rule number 1. This means the risk-averse buyer can buy the stock only around the close of the day. The disadvantage of buying the next day is that the buy price is way above the suggested buy price, and therefore the stoploss is quite deep. However, as a trade-off, the risk-averse trader is buying only after doubly confirming that the bullishness is indeed established.
As per the ACC’s chart above, both the risk taker and the risk-averse would have been profitable in their trades.
Here is another example (Asian Paints Ltd) where both the risk-taker, and the risk-averse trader would have been profitable.
Here is an example where the risk-averse trader would have benefited :
Notice in the chart above, a bullish marubozu has been encircled. The risk-taker would have initiated a trade to buy the stock on the same day around the close, only to book a loss on the next day. However, the risk-averse would have avoided buying the stock entirely because the next day happened to be a red candle day. Going by the rule, we should buy only on a blue candle day and sell on a red candle day.
5.4 – The Stoploss on Bullish Marubozu
What if after buying, the market reverses its direction and the trade goes wrong? Like I had mentioned earlier, candlestick patterns come with an inbuilt risk management mechanism. In case of a bullish marubozu, the low of the stock acts as a stoploss. So after you initiate a buy trade, if the markets move in the opposite direction, you should exit the stock if price breaches the low of the marubozu.
Here is an example where the bullish marubozu qualified as a buy for both the risk-averse and the risk-taker. The OHLC is : O = 960.2, H = 988.6, L = 959.85, C = 988.5.
But the pattern eventually failed, and one would have booked a loss. The stoploss for this trade would be the low of marubozu, i.e. 959.85.
Booking a loss is a part of the game. Even a seasoned trader goes through this. However, the best part of following the candlestick is that the losses cannot run indefinitely. There is a clear agenda as to what price one has to get out of trade provided the trade starts to move in the opposite direction. In this particular case booking a loss would have been the most prudent thing to do as the stock continued to go down.
Of course, there could be instances where the stoploss gets triggered, and you pull out of the trade. But the stock could reverse direction and start going up after you pulled out of the trade. But unfortunately, this is also a part of the game, and one cannot really help it. No matter what happens, the trader should stick to the rules and not find excuses to deviate from it.
5.5 – Bearish Marubozu
Bearish Marubozu indicates extreme bearishness. Here the open is equal to the high and close the is equal to low. Open = High, and Close = Low.
A bearish marubozu indicates that there is so much selling pressure in the stock that the market participants actually sold at every price point during the day, so much so that the stock closed near its low point of the day. It does not matter what the prior trend has been, the action on the marubozu day suggests that the sentiment has changed and the stock is now bearish.
The expectation is that this sudden change in sentiment will be carried forward over the next few trading sessions, and hence one should look at shorting opportunities. The selling price should be around the closing price of the marubozu.
In the chart above (BPCL Limited), the encircled candle indicates the presence of a bearish marubozu. Notice the candle does not have an upper and a lower shadow. The OHLC data for the candle is as follows:
Open = 355.4, High = 356.0, Low = 341, Close = 341.7
As we had discussed earlier, a minor variation between the OHLC figures leading to small upper and lower shadows is ok as long as it is within a reasonable limit.
The trade on the bearish marubozu would be to short BPCL approximately at 341.7 with a stoploss at the high point of the candle. In this case, the stoploss price is 356.0. Of course, we still haven’t dealt with setting targets at this stage, and we will figure that out much later in this module.
Remember this: Once a trade is initiated, you should hold on to it until either the target is hit or the stoploss is breached. If you attempt to do something else before any one of these event triggers, your trade could most likely go bust. So staying on the course of the plan is extremely crucial.
Trade can be initiated based on the risk appetite of the person. The risk-taker can initiate a short trade on the same day around the closing. Of course, he has to make sure that the candle is forming a bearish marubozu. To do this at 3:20 PM, the trader must confirm if the open is approximately equal to the high and the current market price is equal to the low price. If the condition is validated, then it is a bearish marubozu, a short position can be initiated.
If the trader is risk-averse, he can wait till the next day’s closing. The short trade will go through only by 3:20 PM next day after ensuring that the day is a red candle day. This is also to ensure that we comply with 1st rule – Buy strength, and Sell weakness.
In the BPCL chart above, both risk taker and risk-averse would have been profitable.
Here is another chart, Cipla Limited, where the bearish marubozu has been profitable for both risk-taker, and a risk-averse trader. Remember these are short term trades and one needs to be quick in booking profits.
Here is a chart showing a bearish marubozu pattern that would not have worked out for the risk-taker, but a risk-averse trader would have avoided initiating the trade, thanks to rule 1.
5.6 – The trade trap
Earlier in this chapter, we did discuss the length of the candle. One should avoid trading during a minimal (below 1% range) or long candle (above 10% range).
A small candle indicates subdued trading activity, and hence it would be difficult to identify the direction of the trade. On the other hand, a long candle indicates extreme activity. The problem with lengthy candles would be the placement of stoploss. The stoploss would be deep, and in case the trade goes wrong, the penalty for paying would be painful. For this reason, one should avoid trading on candles that are either too short or too long.
Key takeaways from this chapter
- Remember the rules based on which candlesticks work.
- Marubozu is the only pattern which violates rule number 3, i.e. Look for the prior trend.
- A bullish marubozu indicates bullishness.
- Buy around the closing price of a bullish marubozu
- Keep the low of the marubozu as the stoploss
- A bearish marubozu indicates bearishness.
- Sell around the closing price of a bearish marubozu
- Keep the high of the marubozu as the stoploss
- An aggressive trader can place the trade on the same day as the pattern forms.
- Risk-averse traders can place the trade on the next day after ensuring that it obeys rule number 1, i.e. Buy strength, and Sell weakness.
- Abnormal candle lengths should not be traded.
- Short candle indicates subdued activity.
- Long candle indicates extreme activity; however, placing stoploss becomes an issue.
How much of variation in high and low is acceptable in a marubuzo candle pattern. As per rule 2 be flexible with patterns.
Usually if the shadows are within 0.2% to 0.3% of the range it should be ok.
How do we calculate the % can you give an example?
Here is the formula –
(High – Close)/Close.
Is the above formula for bull trend or both?
If not, will the formula for bear trend be :- (high-open)/open
That would be (Close – low)/Close
First of all , I want to thank you for this wonderful lessons. It is so clear and easy to understand for a complete beginner like me.
Now, coming to my problem . I am not confident about the shorting technique. Will you please clarify my doubts.
Say, I want to short a stock X which is currently trading in a bear market at about $100 .
I however, don’t possess this stock . So, how do I sell something that I don’t possess?
Then, when I am confident that this is the appropriate time to buy back (when the trading price is less than $100) , I buy it back. How do I buy back a stock which I never had?
Moreover, the stoploss concept for shorting – does it mean that in case of reverse trade, the stoploss value is the upper limit at which I should buy back with some loss?
It is a concept that you just have to get used to. In stock markets you can sell something that you dont own, provided you buy it back within appropriate time (intraday in case of stocks). This is as good as buying first and selling later, only that the order is reversed in case of shorting.
Yes, when you short the stop loss price is always should be higher than the price at which you short.
Thank you for answering all of my queries in Module 1 ….:)
In Bullish Marubuzo:
1 (high-close)/close For Upper Shadow
2 (low-open)/open For Lower Shadow
In Bearish Marubuzo:
3 (low-close)/close For Lower Shadow
4 (high-open)/open For Upper shadow
If above percentages are in between 0.2% to 0.3% it means pattern exists.
This is what I understood Correct me if any of above formulae is incorrect..:)
You got that right!
Hi Karthik,
While explaining the bullish marubozu, to calculate the percentage of difference(high – close), it was taken as a percentage of the high, hence divided by High.
So, will the formula be (high – close)/high or (high – close)/close ?
Thanks.
It really depends on what you want to measure it against. I do like to measure the range with respect to close, (h-C)/C.
Sir, you explained in subtopic “The trade trap”
One should avoid trading during an extremely small (below 1% range) or long candle (above 10% range).
Please, provide an example regarding this
Apurva, I’d suggest you look at any short or long candle, its is very hard to place SL on these trades, either they are too shallow or gets too risky (long candles).
Can you confirm To day Jindal Steel has formed a Bullish Marubozu? As you said, The variation of Upper and l,ower shadows are 0.2 to 0.3 5 ok..But Here Shadows are more than that?Please let me know whether i should consider this one as a Bullish Marubozu..?
For reasons that you have stated (upper and lower shadow) this would not qualify as a Marubuzo.
How much of variation in Open and Close is acceptable in marubuzo candle pattern. As per rule 2 be flexible with patterns.
Below the data of Rajoo Engineers from 23th October’18 – Can we consider it as bearish marubuzo candle ?
O= 30.80, H= 30.80 , L= 29.30 , C= 29.45
The length of the shadows should not be more than 1% of the length of the real body.
Is it that:
Length of Upper shadow + Length of Lower Shadow should be less than 1% of the length of the real body or
Length of either upper or lower shadow should be less than 1% of the length of the real body.
It is either actually. A marubuzo is not supposed to have any shadow in the first place. YOu can be flexible (but measured) with one side shadow, but if its either ways then the price action is saying something else.
Sir what is the time frame of all the above patterns in the the above examples… In the daily chart if a bullish marubozu is formed then next day which time frame should I look upon… Is it 15 mint or 5 mint
I personally prefer 15 mins, Vivek. For swing trades, I prefer EOD charts.
Can you please explain this a bit more?
If we are waiting for the EOD to make the trade where does the 5 minute and 15 minute candle come into picture?
Thank you.
The 5 and 15 mins come into picture when dealing with intraday trades.
Hey… in point 5.3 you pointed at the red candle day and blue candle day. What does it actually mean there is the candle encircled the first one for the day???????
Please explain …. May be I am late till you have written this page but “der aaye durust aaye”.
please clarify
Sapna, red candle = represents bearishness and blue candle = bullishness. Have explained this and the previous chapter.
Hello Karthik,
Am new to trade and i gone thru this Marubozu candlesticks chapter one we calculate entire day Bullish/Bearish will give result for next day trade?
Example today DHFL is Bullish so it should be bullish day on next day(trade)?
Thanks.
AK
The expectation is that that it the bullishness will continue, but of course thats just a probability 🙂
Buy in strength and sell in weakness means buying in high price and selling low price. Have I misunderstood it. Kindly explain.
Yes, that is correct.
Why one should book loss by buying high and selling low . Plz explain.
Booking a loss really depends on the stoploss! So if the situation demands, then it does make sense to book a loss!
I have a very absurd doubt. Why should i buy when the price is high and less when the price is low. How am i making a profit then. Shouldnt it be the other way sround?
You buy if you feel that the price is going to go higher. You sell if you feel the prices are going lower than where they are today.
Let me clear the fog:
1.When will you buy?
Ans is not at down trend, rather when you see a up trend and you hope for more bulls (strength) upcoming. So, buy strength.
2. Again when will you sell?
You are watching market going down (weak) and calculating that at some point you will lose all you profit earned. So, before that happens, you must sell at whatever maximum profit you can retain from the trade. So sell weakness.
Now, coming to your confusion, as you told it will be a loss buying at higher and selling at lower, it’s 100% correct only when you will exit from the trade forever and never come back to market. But, here, I can suppose you will continue trading after having already faced the above loss, thinking that ‘let me give another try and this time I surely make an attempt to gain something’. And that is the point. Now, read above point 1. So, you will wait for bull. And after some reasonable time, when market revives again you will gain. This is nothing but Shorting, as good named. Hope it’s cleared now. And if not, please tell me.
Hi Karthik,
I am a beginner and these docs are worth of bullish Marubuzo.
As many have asked same question, how does buying at high price and selling at low price makes sense, What I have understood is, you buy a stock as it is forming the Marubuzo and have a stop loss if the stock going down. Is that correct or it means something else?
Thanks.
Well, selling at low price in this context refers to the stop loss price. You only sell at stop loss if you are making a loss. Else you always aim to sell at a price higher than what you’ve bought.
Isn’t buying at high price and selling at low price counter intuitive?
Not really – you are buying strength and selling weakness.
Just feel sitting in the auditorium of Harward university listening a great but simple lecture of renowned professor
Glad to know you are liking the content 🙂
Hi Karthik please let me know what min chart need to follow to find a morbozu and how to check the OHLC PRICE of any morbozu candle.
Candlestick patterns are applicable on any asset any time frame. I would suggest you start with EOD chart and once you are comfortable, you can start looking for these in intraday charts as well.
Today (7th nov) around 105.6 Bullish Marubuzo was formed in RCOM intraday chart and from that it crossed a high of 109.7.
Its due to your article it was easy for me to predict it. Thanks.
Good to know that hawwa !
Please let me know if there any system to know in an candle formation, what is total buy quantity and what is total sell quantity.
It would be hard to distinguish this Raj. One good way make some sense of this is by looking into the volumes.
karthik Ji, If a volume bar represents both buy and sell qty together, its difficult to know from volume also, what is tot buy and tot sell, because every buy is result of some sell obviously and vis versa. kya kia jay…
Suggest you read through this about volumes – http://zerodha.com/varsity/chapter/volumes/
Umm The pic for the Bearish Marubuzo has blue ears.. that got me off guard ..
Otherwise Great content
that pic should have red ears… hehe 🙂
🙂