What’s the difference between a professional trader and a beginner? The ability to read charts and complex chart patterns and identify profit-making opportunities – i.e., know exactly when it’s time to buy assets and when to dump them. A professional trader gets this information from a Japanese candlestick chart made up of individual candlesticks.
How a rice merchant helped traders
Candlestick patterns are a technical analysis tool used to determine potential price movement based on studying Japanese candlesticks – a graphical representation of market data.
The candlestick chart was created by Munehisa Homma, who traded on the Japanese rice exchange at the end of the 18th century. Homma’s charts clearly reflected the highest and lowest prices for rice on a certain time frame, as well as the prices at the beginning and end of a given period.
Steve Nison, a board member of the Society of Technical Analysts (CTA), is known for introducing candlestick charting to the West. In 1989, he wrote a book, “Japanese Candlestick Charting Techniques: A Contemporary Guide to the Ancient Investment Techniques of the Far East,” where he described the basic principles of candlestick analysis and demonstrated dozens of chart patterns.
What do candlesticks tell us?
All the information a trader needs is encrypted in the candlestick’s structure. If you learn to read candlesticks, you’ll be well on your way to becoming a successful trader.
Anatomy of a candlestick
Body – a rectangular part of the candle that represents the opening and closing prices.
Shadow (wick) – the thin part above and below the real body. The top of the upper shadow represents the high price, while the bottom of the lower shadow represents the low price.
Thanks to the candlestick chart, the trader receives the following information about the day’s price action:
– opening price for a specific period,
– closing price for a specific period,
– high and low throughout the period of time the trader specifies.
And the color of the candle reveals the direction of market movement:
- white (or green) body indicates a positive increase in price,
- black (or red) body shows a price decrease.
Alas, the candlestick can’t tell us which came first – the high or the low and it doesn’t reflect the sequence of events between the open and close and how many times the price rose or fell.
The Marubozu Candlestick Pattern
To identify profit-making opportunities successfully, a trader should be able to recognize and read candlestick patterns – combinations of candlesticks on the chart.
There are dozens of candlestick patterns. Depending on the number of candlesticks in the combination, patterns can be divided into three groups:
Marubozu is one of the strongest single patterns. The word “marubozu” means “bald head” or “shaved head” in Japanese. So a Marubozu candlestick has no shadow or wick extending from the top or bottom of the candle.
There are three types of Marubozu candles, depending on how long the shadow is and whether there is one at all:
1. Marubozu Full – a candlestick that practically has no lower and upper shadows.
2. Marubozu Open – a candlestick has a flat opening, but with a short wick at the close price.
3. Marubozu Close – a candle with no wick at the closing price, but with a small shadow extending from the opening price.
The formation of a Marubozu candle on the price chart indicates the beginning of a corresponding trend or a continuation of the current trend. Either the bulls or the bears dominate the market, as evidenced by the absence of the corresponding wicks in the candlestick.
Trader's dictionary Bulls (buyers) - traders who make money in a growing market. Bears (sellers) - traders who take advantage of markets that are falling in price (downtrend).
Brief description of Bullish Marubozu: - white (or green) candle, the closing price is higher than the opening price, - long body with no shadows. What it means: - strong movement is likely to continue in the direction of the candle, - further upside potential.
The appearance of a bullish Marubozu on the chart indicates an upward movement and a strong potential for price growth. For an experienced trader, it’s a signal that the bulls are getting ready to go on the offensive.
Depending on where the bullish Marubozu formed on the chart, there are two possible scenarios:
1. Reversal after a decline – a pattern that signals a reversal. The bears have reached a strong support level. Bulls seize the initiative, which indicates a strong upside potential and a potential trend reversal.
2. Breakout of resistance – a pattern that signals the continuation of an uptrend. The bulls break through a strong resistance level, which results in further growth.
Trader's dictionary Resistance level - when the price of an asset has difficulty moving above a given price level, which then forces it to decline. Support level - the price level that an asset does not fall below for a period of time, indicating strong buying pressure.
Trading bullish Marubozu pattern
It doesn’t matter according to which scenario the bullish Marubozu pattern is formed on the chart. This tells the trader only one thing: the market is completely controlled by buyers, and the price is likely to continue moving up. Therefore, going long would be a strategically correct trading decision. Consider buying an asset of interest after a slight downward correction or after the price has grown above the higher high of a bullish candlestick.
Brief description of the Bearish Marubozu: - black (or red) candle, the closing price is lower than the opening price, - long body with no shadows. What it means: - strong movement is likely to continue in the direction of the candle, - further downside potential.
The bearish Marubozu on the chart indicates a downtrend and signals a decline in prices. The bears seized the initiative from the bulls.
When a bearish Marubozu appears on the chart, we can expect one of these two scenarios:
1. Reversal after growth. A reversal pattern that appears at a higher high after an uptrend. The bulls have hit a resistance level. The bears are pushing the market lower. If they succeed, a downward correction or a possible trend reversal will follow.
2. Support breakout. Downtrend continuation pattern. The bears have reached a support level. If they manage to break it, the price will continue to decline.
Trading bearish Marubozu pattern
The bearish Marubozu pattern on the chart indicates a downtrend. The market sentiment is bearish, so it’s worth selling an asset in question after a slight upside correction or when it moves below the lower low of a bearish candlestick.
Can we rely on Marubozu?
Candlestick patterns are just one of the technical analysis tools. And while they suggest possible scenarios and may provide guidance about the future direction that a price will move, they can’t guarantee 100% accuracy. Many successful traders, such as Karen Foo, honed their skills on demo accounts, testing their strategies and learning how to analyze charts. It’s a great way to dip a toe into the market for novice traders. The profit earned on the demo account can be transferred to a live account. An AMarkets demo account provides you with such an opportunity. After that, you’ll be able to trade like a professional trader.