Chapter-3 Single Candlestick Pattern | Technical Analysis

Single Candlestick pattern Technical Analysis
Single Candlestick pattern Technical Analysis

Definition:

In a single candlestick pattern, we have only one candle to analyse all the action of trading that happened during a particular day. Here, the candle length plays an important role, if the length of single candle is longer, then it means there was a huge amount of buying and selling activity happened on that particular trading day. In a similar manner, if the length of the candle is short then it means less amount of buying and selling activity took place.


Now Let us learn the different types of single candlestick patterns. We already learnt about the history and the structure of candlestick pattern in previous chapter and understood what the bearish and bullish candles are. In this chapter we will learn all the different types of single candlestick patterns in a very simple language. We will also learn how to analyse each single candlestick pattern and how to take advantage of those patterns in trading stocks in order to reap maximum profits.

Types of Single Candlestick Patterns:

Let us understand various different types of single candlestick patterns with simple examples:

1. Marubozu Candlestick Pattern:

In Japanese, the meaning of Marubozu is ‘The Bald’. Hence Marubozu is a type of single candlestick pattern which has only a main body with no upper and lower shadows. There are two types Marubozu candlestick chart patterns:

  • Bullish Marubozu
  • Bearish Marubozu.

But before we move further, let’s stop for a minute and divert our attention to the three main rules one should follow while analysing candlestick patterns. The three rules are:

  • To check strength and weakness during Buying and Selling
  • Degree of flexibility along with patterns.
  • What is the past trend.

Your Attention Please : Marubozu is the type of single candlestick pattern which does not follow the last rule of candlestick patterns, that’s is it has no relation to  past trend and it can be found anywhere in the middle of a candlestick chart. The Marubozu pattern is also further into two types : Bullish Marubozu which is a the green candle (in some charts it can be blue candle also) and the Bearish Marubozu which is indicated by red candle.

1.1 Bullish Marubozu Candlestick Pattern:

As we know that in a Marubozu candlestick pattern there is no upper or lower shadow; in a bullish Marubozu the lower part of the candle represents the opening price of the stock and the higher part of the candle represents the closing price of the stock. In other words, we can derive that in a bullish Marubozu, Low=Open & High=Close.Bullish Marubozu Single Candlestick pattern Technical AnalysisAs we look at a Bullish Marubozu, we can say that a great amount of trading activity happened in the stock, throughout the day. In simple words we can say that a large number of buyers were present at almost all price points during the day. In other words, we can say that the buying activity happened in the stock throughout the day in such a manner that the stock closed at its highest price of the day.

A bullish Marubozu gives a signal that huge amount of buying interest is shown by the traders and this buying interest can remain for next few days. Bullish Marubozu also indicates that the stock can open at the same price at which it closed previous day that is the Previous Day Close Price = Next Day Open Price. A trader should be always ready for trading opportunity whenever he identifies a Bullish Marubozu pattern.

Let us learn to recognize a bullish Marubozu candle with example in real candlestick patterns:





In the above chart, we can see a green candlestick in a circle. This is a bullish Marubozu candlestick pattern as the upper and lower shadow is absent. Also, the lowest price is equal to the opening price of the stock and the highest price is equal to the closing price of stock.

Note : When a Bullish Marubozu pattern is recognised by the trader then he should look at buying opportunities. The buy price should be around the closing price of the Marabozu. In India, Stock market closes at 3:30 PM so a trader should check if the current market price (CMP) of the stock 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 met, then Marubozu pattern is formed and therefore you can buy the stock around the closing price.

1.2. Bearish Marubozu Candlestick Pattern:

Bearish Marubozu is just opposite to a bullish Marubozu candlestick pattern. In a Bearish Marubozu candle, the higher value is the opening price of the stock and the lower value is the closing price of the stock. Hence we can derive that that in a Bearish Marubozu, High=Open & Low=Close.

A bearish Marubozu candlestick pattern indicates that there was huge amount of selling pressure on the stock as there were large number of sellers as compared to buyers. In simple words we can say that a large number of sellers were present at almost all price points during the day. In other words, we can say that the selling activity happened in the stock throughout the day in such a manner that the stock closed at its lowest price of the day.

A Bearish Marubozu gives a signal that huge amount of selling activity is done by the traders and this selling pressure can remain for next few days. Bearish Marubozu also indicates that the stock can open at the same price or below the price at which it closed previous day. A trader should be always ready for Shorting opportunity whenever he identifies a Bearish Marubozu pattern.

Let us understand the Bearish Marubozu candlestick pattern with the help of an example :

In below chart,we can see a red candlestick in a circle. This is a Bearish Marubozu candlestick pattern as the upper and lower shadow is absent. Also, the highest price is equal to the opening price of the stock and the lowest price is equal to the closing price of stock.

Note : When a Bearish Marubozu is recognised by the trader, he should look at shorting opportunities instead of buying as we can see in the above chart, the next candle after bearish Marubozu is also red which shows the stock opened lower the next day and this downtrend can remain for next few days.

2.Spinning Top Candlestick Pattern:




As the name applies, it looks similar to a top spinning and hence its name Spinning Top, which is a candlestick pattern with a small real body and almost equal lower and upper shadow. It gives little to no information on trading signal about specific entry or an exit point but it provides some important information when it comes to identify the current market situation. Below image shows the spinning top candlestick patterns.A spinning top consist of three main components:

  1. Small real body – It shows that the opening price and closing price of the stock are very close to each other. For example, let us suppose the opening price of a stock is Rs 160 and the closing price of the stock is Rs 163. Or the opening price is Rs 160 and closing price is Rs 157. In both the cases, the difference between closing and opening price is very small and thus as a result a small real body will be formed. As the opening and closing price points of the stock are very close to each other, the colour of the candle rarely matters much.
  2. The upper shadow – The upper shadow usually indicates the high point the stock touched during a particular day. In the bullish candle which is green or blue in color the high point of the candle is equal to the closing price of the stock whereas in a bearish candle which is red in color, the high point of the candle is equal to the opening price of the stock on a particular day. The presence of upper shadow indicated that the buyers tried to take the stock price higher but they were not successful in their attempt.
  3. The lower shadow – The lower shadow represents the lowest price of the day.In the bullish candle which is green or blue in color the lowest point of the candle is equal to the opening price of the stock whereas in a bearish candle which is red in color, the lowest point of the candle is equal to the closing price of the stock on a particular day. The presence of lower shadow indicates that the sellers tried to take the stock price down but they were not successful in their attempt.

Spinning tops are the indicator of the indecisiveness and uncertainty in the market that is when the bulls(buyers) are trying to take the stock higher whereas on the other hand bears are trying their best to take the stock lower and in both the cases nothing is working for either bulls or bears then this moment of indecisiveness is indicated by spinning tops with a small body.

Below chart shows spinning top formation in uptrend and downtrend :

spinning top Single Candlestick pattern Technical Analysis

Occurrence of spinning tops in a down trend :

As we know that in a downtrend Sellers (Bears) are always in full control of the stock price as they are ones who are trying to push the stock price down. When we see a spinning top in downtrend then it shows that the stock is going through a consolidation phase that is both bulls and bears are not going extreme with their activities of buying and selling of stocks.

This creates a situation of uncertainty where no one knows in which direction the stock price will head.

This can lead to two situations:

  • The first situation can be where bears hold the upper hand and begin there another round of selling which will result in the stock price moving lower.
  • The second situation can be where bulls are the majority buyers and a reversal takes place which will result in the stock price moving higher.

So spinning tops just give an indication of a Breakout in either direction that is the stock can move lower or a reversal can take place and the stock starts moving higher.

Occurrence of spinning tops in a uptrend :

Occurrence of spinning tops in a downtrend has the same effect that it has in a down trend and it shows that stock is going through a consolidation phase as the bulls are now not in full control and a breakout can happen on either side that is a new round of buying can happen from the Bulls or a reversal can take place where the bears take the full control and bring the stock price lower.

 3. Doji Candlestick Pattern:




A Doji is pretty much same to a spinning top candlestick pattern however, the difference is that in a doji the real body (middle part) is missing. As the real body is not present, we can conclude that the opening price and the closing price of the stock is almost equal. A Doji gives very important information about a stock which can help a trader to make some crucial trading decisions.

A candlestick pattern which has a very thin middle part (real body) can be considered as a doji since the difference between the opening price and closing price of the stock is very negligible. Since in a doji the is hardly any difference  between the opening and closing price of the stock, the colour of the candle doesn’t matter much. If you identify some continuous dojis in a candlestick chart of a stock, this means there is an indecision in the market and the stock can give a swing move in either ways.the doji Single Candlestick pattern Technical Analysis

Have a look at the chart below, where the dojis appear in a downtrend indicating indecision in the market before the next big move.

the doji Single Candlestick pattern Technical Analysis

4. The Hammer :




The Hammer is a bullish pattern and it occurs mostly after a significant downtrend. If this pattern occurs after a significant up-trend, then it is called a Hanging Man. In a Hammer candlestick pattern the real body is very small in size since the difference between the opening and closing price is very less. After the real body a long lower shadow is present which is significantly lower than the open, high, and close price of the stock. The real body can either be red or green/blue.The chart below shows the presence of two hammers formed at the bottom of a down trend.

Hammer Single Candlestick pattern Technical Analysis

Notice for green and red hammer in the chart with the long lower shadow. However, the color of hammer doesn’t matter at all but a hammer of green/blue color gives more confidence. The thing which matters in hammer is the long lower Shadow. During hammer formation one should always look for this important rule that hammer pattern should always form in a downtrend that is when market is on lower side. The long lower Shadow indicates movement of stock price with very less volumes which happens due to the reason that the bulls tried to take the control back from the bears and new buying interest emerges which indicates a sign of major reversal that can take place on upper side.

Therefore, a hammer formation indicates that the next move will be on the upper side and a trader can take along position based on his risk appetite. The trader should put a stop loss at the lowest point of the hammer formation.

5. Shooting star:




This Shooting star pattern indicates a minor reversal in the trend when it occurs after a significant rally. The real body of the shooting star should appear near the low price of the stock and the length of the upper shadow should be longer than usual that is it must be atleast twice the length of the real body.Shooting Star Single Candlestick pattern Technical Analysis Shooting Star Single Candlestick pattern Technical Analysis

Unlike a Hammer pattern, the shooting star does not have a long lower shadow. Instead it has a long upper shadow where the length of the shadow is at least twice the length of the real body. The colour of the body does not matter much, however as a confidence booster red color body is more preferred. The longer the upper shadow, more it gives an indication of bearishness.

The small real body is a common feature between the shooting star and the hammer.

In general, the shooting star should not contain a lower shadow but in practicality a lower shadow which is not bigger than half of the real body can be considered. The shooting star is an indicator of bearish pattern and therefore it should always occur during an uptrend when the market is higher.

The traders who want to take short positions can go ahead with their sell positions whenever they see the formation of shooting star and they can place a stop loss at the top point of the upper shadow of the Shooting star pattern.

In next chapter we will learn about Multiple Candlestick Patterns which is a favorite topic for any technical Analyst.

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