3.20 Basic Candlestick Patterns
Now that you have a shrewd idea of what candlesticks indicate with their bodies and wicks, let’s cut our teeth on some simple and uncomplicated candlestick patterns.
These are fairly common and quite likely to appear before you in a normal Forex trading session – so knowing instantly what they mean, and taking the proper trading decision immediately, could make the difference between a winning and losing trade!
Marubozu….who? you ask! Don’t get alarmed, nothing weird here just a specific shape of candle on your candlestick chart!
The actual pronounciation of Marubozu is Marubouzu. In Kanji it is written as 丸坊主.
- 丸 = Maru = Circle or Zero and may mean complete
- 坊主 = Monk
Japanese monks are generally bald and adding Maru makes it completely bald and hence Marubozu = Completely bald. So we can say "Bald Candles" - No hair or in this case no wicks or upper or lower shadows.
As you can see these are candles without wicks. And depending on whether the candle is green or red, it is very bullish or bearish. The green Marubozu shows that prices pushed up after the open and closed at the highest point of the day – a non-stop bullish move that steam-rolled the bears. The red Marubozu is the reverse and shows that prices collapsed after the open and closed at the low of the day – here the bears had complete and unchallenged control of the market.
Bullish Marubozus can mean a continuation of the existing bullish trend or a reversal of the current downtrend. Similarly bearish Marubozus signify that the current bearish trend may intensify further, or the current uptrend may reverse.
Let's have a look on Marubozu candles on real trading charts:
These patterns are as indecisive as the Marubozu candles were definite.
These are candles having a long upper wick and also a long lower wick but small bodies. Here, the color of the body does not carry much significance. The pattern is very much like a child’s spinning top – hence the name. But on the trading battlefield what does this pair of patterns signify? It shows indecision and a stalemate – all around.
The small green body itself shows little change in prices. The long shadows at both ends indicate tussles between the bears and bulls with neither able to prevail. So the prices ranged significantly in both directions around the open and close, but on a net basis, there was no appreciable change.
Spinning tops usually signal a change of trend.
These are candles that have no body – where the opening and closing prices are same, or almost close. Hence the body of the candle is really just a line.
There are four kinds of doji, and of these three have long shadows, and one has no shadow at all.
The four-prize doji means that all four i.e. the open, close, low and high prices are all the same and there was no price movement during that period. This is a rare pattern and more rare if the time-frame of the chart is longer. This pattern can mainly be seen on very short-time frame chart at times.
The dragonfly doji has a long lower tail joined to a line. There is no upper shadow – so it looks like a suspended T. Bears pushed the price deep down but then bulls rallied back the price back to the opening level. In this case the open, close and high prices are all same and the low is far below this level.
The gravestone doji is the mirror reverse of a dragonfly doji – an inverted T. There is no lower shadow. Bulls pushed up the prices from the open, but bears then managed to drag down the prices back to the open. The open, close and low prices are all the same.
The long-legged doji has long wicks on either side of the body, generally equal in length. Like a spinning top it indicates an unresolved and indecisive tussle between the bulls and bears.
Note: Though an ideal doji candlestick pattern means that the open and close prices are same but even if the price difference is very low e.g. 1 or 2 pips, the pattern would tend to work like the ideal doji pattern.
Dojis should usually be interpreted with reference to the current trend and the candlestick pattern prior to the doji. A doji appearing during an uptrend and after a green Marubozu could signal that the bulls have exhausted their ammunition and the bears have taken the first baby steps towards reversing the trend in their favor. Similarly a doji appearing during a downtrend and after a red Marubozu is a signal that bears may be done with their selling and the bulls are poised to counter-attack.
Word of caution: Doji candlestick pattern represents confusion, lack of clarity and uncertainty and hence needs to be considered as such. Caution is required while trading based on this pattern as it is not always reliable.
Let's move ahead and check some more candlestick chart patterns in the next few lessons.
- Basic Candlestick Patterns