Multi-session candlestick patterns are generally used to identify market trend reversals or continuations. However, sometimes, a single-candle pattern can also be powerful enough to indicate trend continuation or chances. One such reliable intraday chart pattern that is represented using just one candle is the Marubozu candlestick pattern.
It is commonly used in technical analysis to determine if the buyers or the sellers have the upper hand in the market. Read on to find out more about the meaning of the Marubozu candlestick pattern, what it indicates and how you can trade based on this signal.
What is the Marubozu candlestick pattern?
A Marubozu candlestick pattern indicates strong momentum and market sentiment, either for prices to go down or upward from the current price levels. There are two types of Marubozu candlestick patterns: bullish Marubozu and bearish Marubozu. A bullish Marubozu has a long body with no upper or lower shadows. The open and close are at the extremes of the candlestick, with the close being at the highest point. On the other hand, the bearish Marubozu pattern has a long body with no upper or lower shadows. The open and close are at the extremes of the candlestick, with the open being at the highest point.
The Marubozu pattern indicates strong momentum and can signal a continuation or reversal of the current trend. The signal is always significantly strong, allowing investors to position their investments according to the type and strength of the pattern.
The absence of upper and lower shadows means that the high and low prices of the stock or security correspond with its opening and closing prices during the trading session. Depending on how these two sets of prices align, Marubozu candles can be bullish or bearish, as explained below.
Features of Marubozu candlestick pattern
Here are the distinct features of the Marubozu candlestick pattern:
- Absence of wicks: The Marubozu pattern either shows very short wicks or no wicks at all.
- Large body: The Marubozu has a long body. This indicates that the opening and closing prices are at the extremes of the trading range for that period.
- No shadows: The pattern does not have an upper and lower shadow, reflecting strong buying or selling pressure.
- Investor sentiment: The identification of the Marubozu pattern suggests strong buying or selling interest and that the price may continue to rise or fall.
What is the importance of Marubozu candlestick patterns?
The Marubozu candlestick patterns allow investors to identify if the current trend will lead to a stock price rise or fall. A bullish Marubozu pattern indicates that there is a strong uptrend in the stock market, while a bearish Marubozu pattern suggests that the stock prices are likely to fall from the current levels.
Investors and traders identify a bearish Marubozu pattern and buy the stocks as they are likely to increase in price. They make profits due to the capital appreciation when the price increases. If they identify a bullish Marubozu pattern, they may either book profits in the current investments or place orders for short-selling to profit from the potential fall in the stock price.
How to identify Marubozu candlestick patterns?
A bullish Marubozu candlestick pattern has a long body with no upper or lower shadows. The open price is at the low end of the body, and the close price is at the high end of the body. This means that the stock is witnessing a high demand for buying, and investor sentiment is positive. On the other hand, a bearish Marubozu pattern looks similar, with a long body and no upper or lower shadows. However, its open price is at the high end of the body, and the close price is at the low end of the body. Another indicator is trading value, as all the Marubozu patterns show high trading volume, creating strong price fluctuations.
Example of how to use a Marubozu candlestick pattern
Suppose you are monitoring a stock’s price and see the formation of a bullish Marubozu pattern. The candlestick shows the stock opened at Rs. 100, rose throughout the trading day, and closed at Rs. 120, with no upper or lower shadows, indicating strong buying demand. You can place a buy order at Rs. 121, a stop-loss at Rs. 110, and a target price of Rs. 140, as the trend may increase the price substantially.
Types of Marubozu candlestick patterns
Marubozu candlestick patterns can indicate strong bullish or bearish movements. Depending on the direction of price change, you can find two types of Marubozu candlesticks:
Bullish Marubozu candle
The bullish Marubozu candlestick pattern is a green (or white) candle that indicates upward price movement during the trading session. Here, the opening price is the same as the low, and the closing price is the same as the high. This effectively means that the price rose steadily throughout the trading session, with the buyers dominating the sellers by a large margin.
Bearish Marubozu candle
A bearish Marubozu candlestick pattern is the opposite of the bullish Marubozu. Here, the opening price is the high, and the closing price equals the low. This effectively means that the price fell steadily during the trading session, resulting in a red (or black) candle with no wicks. The supply-demand dynamics during such a session heavily favour the sellers, who dominate the market.
Interpreting the Marubozu candlestick
You now know the definition of the Marubozu candlestick pattern and what each candle indicates about the trading session it represents. However, what does it mean for the overall trend when a Marubozu candlestick appears? Let us find out.
Bullish Marubozu candle
If a bullish Marubozu appears during a prevailing uptrend, it typically indicates that the buyers are aggressively purchasing the security. This means that the bullish run may continue with a strong momentum.
However, if a bullish Marubozu candlestick pattern is found at the end of a prevailing downtrend, it may mean that the sellers are losing control of the market to the buyers. This indicates a potential trend reversal from a bear market to a bull run. You can wait for one more trading session to confirm if the buyers continue to dominate the market before making a trade.
Bearish Marubozu candle
A bearish Marubozu candle may also occur during an uptrend or a downtrend. If you find this pattern at the end of the current bull run, it means the sellers have entered the market in high volumes and are gaining control. A bearish reversal may be in the offing. You can confirm this using other technical indicators or wait for one more trading day to check if the downward trend persists in the market.
Alternatively, if you find a bearish Marubozu candlestick pattern during a prevailing downtrend, it means that the sellers — who are already in control — are continuing to aggressively offload their holdings. This means the downtrend will likely persist for a few more sessions.
Also read: What is the double bottom pattern?
Trading based on the Marubozu candlestick pattern
The price points for trade entry, exit and stop-loss depend on the type of Marubozu candlestick pattern on which you are relying. Here are the details you should know.
1. For a bullish Marubozu candlestick pattern
- Trade entry: It is advisable to enter a long position when the price breaks above the high of the Marubozu candle.
- Stop-loss limit: The stop-loss price should ideally be set below the low price of the Marubozu candlestick.
- Target price: The take-profit level can either be a previous resistance level or a price set based on your risk-reward preferences.
2. For a bearish Marubozu candlestick pattern
- Trade entry: If you spot a bearish Marubozu candlestick pattern, you may want to initiate a short position at a price below the low of the candle.
- Stop-loss limit: For this trade, the stop-loss limit should ideally be the price above the high of the Marubozu candlestick.
- Target price: You can choose a suitable support level as your target price or set an exit based on your preferred risk-reward ratio.
What happens after a Marubozu candlestick pattern?
Traders and investors identify the formation of the Marubozu pattern, which can be bullish or bearish. Once identified, they often use various other indicators, such as moving averages, trend lines, etc., to ensure effective pattern confirmation. If their identification is of a bullish Marubozu pattern, the uptrend will continue, and the stock price will increase from the current levels. However, if a bullish Marubozu pattern appears after a downtrend, it might indicate a potential reversal to the uptrend, and the price will fall.
If traders and investors have identified a bearish Marubozu pattern, it indicates that the downtrend will continue and the stock price will fall further from its current levels. If a bearish Marubozu appears after an uptrend, it might indicate a potential reversal to the downtrend, and the stock price will increase.
What are the benefits of a Marubozu candlestick?
Here are the benefits of a Marubozu candlestick pattern:
Strong trend indicator
The pattern indicates a strong bullish or bearish trend in the market, allowing investors to manage their existing investments or place fresh orders.
Clear indication
The Marubozu pattern does not have any shadows or wicks, which helps investors identify the pattern clearly without any confusion.
Easy to spot
The pattern is fairly easy to identify for investors and traders, which helps them manage their investments effectively. It also helps beginners to analyse the stocks.
Reversal patterns
A Marubozu pattern can also signal potential reversals. A bullish Marubozu pattern at the end of a downtrend might indicate a reversal to the uptrend, while a bearish Marubozu pattern at the end of an uptrend might suggest a reversal to the downtrend.
What are the limitations of a Marubozu candlestick?
Here are the limitations of a Marubozu candlestick pattern:
Lack of information
The pattern only provides information to traders and investors on the opening and closing prices of the stock for the day, which lacks important information about the highest or the lowest price points.
Limited usage
The Marubozu pattern is not ideal for all market conditions and has limited applications for investors and traders. It does not provide any information about intra-day volatility or potential reversals that might occur within the session.
False signals
The pattern can sometimes produce false signals in a sideways or unpredictable market. This can lead to wrong order placements and potential losses.
Over trading
In a highly volatile market, a Marubozu pattern can occur numerous times, leading to overuse or over-trading for investors and traders.
What are other types of candlestick patterns besides Marubozu?
There are numerous other types of candlestick patterns besides the Marubozu pattern. Some of the most commonly used ones are as follows:
Bullish hammer
A bullish hammer is a candlestick pattern with a small body and minimal upper shadow that indicates potential reversals in a downtrend. It has a small body near the top of the candlestick, a long lower shadow (at least twice the length of the body), and little to no upper shadow.
Evening star
The evening star pattern indicates a potential bearish reversal in an uptrend. It suggests a shift in market and investor sentiment from bullish to bearish, indicating that the uptrend may be ending and a downtrend could begin. Traders and investors can either sell their holdings or initiate short-selling.
Hanging man
The hanging man candlestick pattern is bearish in nature, identifying a potential fall in stock prices from current levels. The pattern forms at the end of an uptrend and features a small body near the bottom of the candle and a long lower shadow. It signals that the prices may fall from the current levels.
Dark cloud cover
The pattern looks like a dark cloud covering the prices from the day before and indicates a bearish shift in the stock price trend. The pattern is formed through two candlesticks where the first one is red and the second one is green.
Conclusion
This concludes our guide on the Marubozu candlestick pattern and what it indicates in the market. Now that you are aware of how to spot this candle and use it to initiate or exit a trade, you can take the required measures to use this pattern to your advantage.
