Discussion Topic: Marubozu Candlestick Pattern
In this article, we will discuss the marubozu candlestick pattern. In this lesson, you will learn how to identify a marubozu candlestick pattern? What they convey about the market trend? When and why marubozu candle is useful in trading?
What is a Marubozu Candlestick Pattern?
The marubozu candlestick pattern is formed by a single candle. In the Japanese language, the word "Marubozu" means “Bald”. Deriving from that, a perfect marubozu means a candle with no upper or lower shadow. It will only have a real body. A marubozu candle can be of two types - the bullish marubozu and the bearish marubozu.
This pattern is a strong indication of trend reversal or trend continuation depending on where it appears.
It may be a bearish or bullish candle. The color of the candle matters a lot as a bullish marubozu in uptrend implies trend continuation whereas in a downtrend it means trend reversal. For bearish marubozu it's just opposite. Hence, you must take into consideration the color of the candle while doing technical analysis.
How to Identify a Marubozu Candle?
It’s a single candlestick pattern. In this pattern, the candle will only have a real body and will not have any kind of shadows. In bullish marubozu, the open price equals to low price and the close price equals to high price. For bearish marubozu, open price equals to high price and the close price equals to low price.
So, the identification mark for an ideal spinning top will be:
- Large actual body
- There will be no shadow at either side of the candle.
- The color of the candle has very significant meaning.
[Note: A perfect marubozu is very rare in actual market condition. Hence, sometimes a minor difference (usually less than 0.01% of the candle range) between the open/close price with high/low price is neglected while identifying marubozu.]
How to Trade the Marubozu Candlestick Pattern?
Depending on the color of the candle, it simply means that either the buyers or the sellers got the full control of the market.
Depending on the type of marubozu, the trading style will be different. We will now discuss how to trade with both bullish marubozu and bearish marubozu.
But in either case, you should wait for another confirmation candle or pattern before entering into a trade.
Trading With Bullish Marubozu:
The absence of the upper and lower shadow in a bullish marubozu means that the low price is equal to the open price and the high price is equal to the close price. Hence whenever we see a candle with Open = Low and Close = High, we can call it a bullish marubozu.
A bullish marubozu points that there is so much buying interest in the stock (or instrument) that the market participants were willing to buy the stock at every price point during that session. Therefore the price of the stock closed near its high point for that session.
If the bullish marubozu appears in an uptrend it strongly implies a trend continuation. But while appearing in a downtrend, it indicates a trend reversal, that the market's sentiment has changed and the stock is now bullish.
The expectation is that with this sharp change in sentiment there will have a surge of bullishness and the same will continue over the next few trading sessions. Hence a trader should look for buying opportunities after the occurrence of a bullish marubozu. The suggested buy price is little above the closing price of the marubozu (Bullish Breakout).
Trading With Bearish Marubozu:
A bearish marubozu suggests extreme bearishness in the market. Here, that the high price is equal to the open price and the low price is equal to the close price. Hence whenever we see a candle with Open = High and Close = Low, we can call it a bearish marubozu.
A bearish marubozu signifies that the sellers are in absolute control of the market. There is so much selling pressure in the stock (or instrument) that the market participants are willing to sell the stock at every price point during that session. Therefore the price of the stock closed near its low point for that session.
If the bearish marubozu appears in a downtrend, it denotes a strong trend continuation. But appearing in an uptrend, it works as a trend reversal pattern, i.e. - that the market's sentiment has changed and the stock is now bearish.
The real expectation is that with this sharp change in sentiment there will have a surge of bearishness and the bearishness will continue over the next few trading sessions. Hence a trader should look for selling opportunities after the occurrence of a bearish marubozu. The suggested selling price is slightly below the closing price of the marubozu (Bearish Breakout).
Avoiding False Marubozu Signals and Setting Stop Loss:
In most of the cases, the stop-loss for any trade taken on the basis of marubozu should be high or low of the candle.
Though marubozu is a very strong candlestick pattern, you should avoid trading on extremely small (below 0.5% range) or long candle (above 5% range). An extremely small candle means reduced trading activity and hence it may be a false signal. Then again, a long candle indicates extreme activity and in that case, the stop-loss for that trade would be very deep. For this reason, you should avoid trading on candles that are either too short or too long. Also, you should also take farther confirmation from another pattern or technical indicators before entering int the trade.
We hope that you have enjoyed the above article explaining the Marubozu Candlestick Pattern and how to trade with it. Be with us to explore forex trading, stocks trading, and other money-making opportunities.
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