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Candlestick Charting - the Marubozu indicator

By  Sep 29, 2011

Topics: Finance & Investing

Candlesticks are very revealing, especially as confirmation signals or as early warning of a coming reversal. Among the most revealing is the Marubozu, with means “bald.” It is so called because the stick has little or no upper or lower shadows.

The candlestick is a rectangular expression of the trading day, called the “real body.”  The top and bottom represent the session’s opening and closing prices. A white candlestick is an upward-moving day and a black candlestick is a downward-moving day. The shadows (sticks above or below the rectangle) represent the full day’s trading range above and below the opening and closing prices.

These attributes are important because some shapes are especially strong in what they reveal. A long day (exceptionally broad trading range) is a strong bullish or bearish signal. A variation of the long day is the Marubozu, which is a long day with very little or no shadows. A “pure” variety has no shadows whatsoever. This candlestick’s daily trading range is the same as its opening and closing prices.

Other variations of the Marubozu have small upper or lower shadows, or both. When a Marubozu appears within a trend, it can have several meanings:

            1. A white Marubozu in an uptrend indicates a likelihood of continuation.

            2. A white Marubozu in a downtrend foreshadows a reversal.

            3. A black Marubozu in a downtrend indicates confirmation of continuing downward movement.

            4. A black Marubozu in an uptrend is a strong reversal signal, foreshadowing the end of the trend and a coming reversal.

These are generalizations, which is why any indicator -- candlesticks included -- are best used to confirm other trending signals, or when the candlestick is independently confirmed. Typical confirmation indicators include traditional Western-style signs like support and resistance breakthroughs, repetitive gaps, head and shoulders patterns, and double or triple tops or bottoms. Other technical momentum indicators like MACD, RSI, or CMF are also valuable to confirm that candlesticks seem to be foreshadowing.

One cautionary note: All candlesticks are relative and you cannot always compare two charts on the same basis. If the price scale is not the same, a long session’s meaning varies as well. Scaling is set automatically to make all of the price movement within a selected period fit into the rectangle of the chart. This means that a low-priced stock may be priced in one-quarter point increments and a two-point move could appear as a very long candlestick. In comparison, a higher-priced stock could be priced in five-point increments, so that a two-point move looks inconsequential. The key here is that all candlestick indicators need to be compared to other sessions for the same stock, and not for similar movements on charts of other stocks.

The single-stick sign like the Marubozu and other reversal or continuation signals enhance every trader’s charting skills and can vastly improve the timing of entry and exit. While greater reliance may be given to double-stick and triple-stick signals due to their stronger trending attributes, some of the more reliable candlesticks show up as one-session signs. The Marubozu, the chartist’s little hairless friend, shows up often enough that what it indicates should not be ignored.

Michael C. Thomsett is an instructor with the New York Institute of Finance. He teaches five  courses: “Swing Trading with Options,” “The Amazing World of Options,” “Synthetic Options Strategies”, “Options timing and dividend income strategies,” and “Using candlestick reversal and continuation patterns to improve timing.”  He is also an investing and options author and has also written for FT Press’ Agile Investor series, which can be viewed on FTPress.com.