Technical analysis : Single candlestick patterns

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Single candlestick patterns

• A specific pattern formed by just one candle. Hence, trading signal is generated based on 1 day trading action.
• The length of candle signifies the range for the day. In general, the longer the candle, the more intense is the buying or selling activity.
• 
• Some attention should be paid to candle length when trading based on candlestick patterns.
• If the candles are short, it can be concluded that the trading activity was subdued, hence, one should avoid trading on the basis of subdued short candles.
• If the candles are too long, it can be concluded that the trading activity was extreme. The problem with lengthy candles would be the placement of stoploss. The stoploss would be deep, and in case the trade goes wrong, the penalty for paying would be painful.

• Risk-taker traders can place the trade on the same day as the pattern forms.
• Risk-averse traders can place the trade on the next day after ensuring that it obeys rule of Buy strength, and Sell weakness.

Marubozu

• A Marubozu can appear anywhere in the chart irrespective of the prior trend. Hence, Marubozu violates the assumption of ‘Look for a prior trend’.
• Marubozu : Candlestick with no upper and lower shadow i.e. A Marubozu has just the real body.
• 
• Green candle : Bullish marubozu
• Red candle : Bearish marubozu
• Bullish Marubozu
  • Absence of the upper and lower shadow in a bullish marubozu → Low is equal to the open and High is equal to the close.
  • Open = Low and High = Close
  • 
  • A bullish marubozu indicates that there is so much buying interest in the stock that market participants were willing to buy the stock at every price point during the day, so much so that the stock closed near its high point for the day. No matter what the previous trend has been, action on Marubozu day shows that sentiment has turned and the stock is now bullish.
  • The expectation is that with this sudden change in sentiment, there is a bullish bounce, and this bullish sentiment will continue over the next few trading sessions. Therefore a trader should consider buying opportunities with the occurrence of a Bullish Marubozu. The buy price should be around the Marubozu closing price.
  • 
  • Stoploss : Low of the stock
  • So when you initiate a buy trade, if the markets move in the opposite direction, you should exit the stock if the price breaks the Low of Marubozu low.
  • Target :
• Bearish Marubozu
  • Absence of the upper and lower shadow in a bearish marubozu → Open is equal to the high and Close is equal to low.
  • Open = High, and Close = Low
  • 
  • Bearish Marubozu indicates extreme bearishness.
  • A bearish marubozu indicates that there is so much selling pressure in the stock that the market participants actually sold at every price point during the day, so much so that the stock closed near its low point of the day. No matter what the previous trend has been, action on Marubozu day shows that sentiment has turned and the stock is now bearish.
  • The expectation is that this sudden change in sentiment will be carried forward over the next few trading sessions, and hence one should look for shorting opportunities. The selling price should be around the closing price of the marubozu.
  • 
  • Stoploss : High of the stock
  • So when you initiate a sell trade, if the markets move in the opposite direction, you should exit the stock if the price breaks the High of Marubozu low.
  • Target :

Spinning top

• Small real body + Upper and lower shadows are almost equal in length.
  • Small real body
    • Open price and close price are very close to each other.
    • The colour of the candle does not really matter.
  • Upper shadow (Upper wick)
    • The upper shadow connects the real body to the high point of the day.
      • If it is a red candle, the high and open are linked.
      • If it is a green candle, the high and close are linked.
  • Lower shadow (Lower wick)
    • The lower shadow connects the real body to the low point of the day.
      • If it is a red candle, the low and close are linked.
      • If it is a green candle, the low and open are linked.
  • 
• The bulls tried unsuccessfully to move the market up. The bears tried to take the markets down, and that too did not work. Neither the bulls nor the bears could establish any influence on the market as it is evident from the small real body. Thus a spinning top is a sign of a market where indecision and uncertainty prevail.
• A spinning top in isolation simply reports indecision in market as both the Bulls and the Bears were not able to influence the markets. It does not give the trader a trading signal with a specific entry or exit point.
• However, spinning top concerning the chart trend gives a compelling message based on which you can build your positions in the markets.
• Spinning tops in a downtrend
  • In a downtrend, the bears are in complete control as they manage to push the prices lower.
    • With the spinning top in the downtrend, the bears could be consolidating their position before another round of selloff.
    • The bulls have also tried to contain the fall in prices and have tried to maintain their positions, though not successfully. After all, if they were successful, the day would have resulted in a nice green candle, not really a spinning top.
  • Either the bears are pausing before they can resume the downtrend further or the bulls are preparing to break the trend and take the markets higher.
  • Outcome : Continuation of downtrend or Reversal of the trend
  • 
• Spinning tops in an uptrend
  • In a uptrend, the bulls are in complete control as they manage to push the prices higher.
    • With the spinning top in the uptrend, the bulls could be consolidating their position before another round of buying.
    • The bears have also tried to contain the rise in prices and have tried to maintain their positions, though not successfully. After all, if they were successful, the day would have resulted in a nice red candle, not really a spinning top.
  • Either the bulls are pausing before they can resume the uptrend further or the bears are preparing to break the trend.
  • Outcome : Continuation of uptrend or Reversal of the trend
  • 
• Spinning top candle shows confusion and indecision in the market with equal chances of a reversal or continuation. Until the position becomes clear, traders should remain cautious and reduce their position size.

Doji

• Open price should be equal to the close price with virtually a non-existent real body. The upper and lower wicks can be of any length.
• 
• Similar to spinning tops, except it does not have an actual body i.e. open and close prices are equal.
• For practical purposes, even if it has a wafer-thin body, the candle can be considered a Doji. (Be flexible with patterns)
• The colour of the candle does not matter even in case of a wafer-thin real body.
• Similar to spinning tops, a doji in isolation simply reports indecision in market as both the Bulls and the Bears were not able to influence the markets. It does not give the trader a trading signal with a specific entry or exit point.
• 
• In fact, often dojis and spinning tops appear in a cluster indicating indecision in the market.

Paper umbrella

• Long lower shadow with a small upper body.
• The length of the lower shadow should be at least twice the length of the real body (Shadow to real body ratio)
• 
• A single candlestick pattern that helps traders to set up directional trades based on where it appears on the chart i.e., Trend reversal pattern.
  • Bearish : Hanging Man → If the paper umbrella appears at the top end of an uptrend rally
  • Bullish : Hammer → If the paper umbrella appears at the bottom end of a downward rally

• Hammer (Bullish)
  • Paper umbrella that occurs at the bottom of the trend.
  • A hammer consists of a small real body at the upper end of the trading range with a long lower shadow.
  • Bottom reversal patten.
  • The longer the lower shadow, the more bullish the pattern.
  • Open and close prices should be close to each other.
  • The colour of hammer does not really matter (as open and close prices are close to each other) as long as it qualifies ‘the shadow to real body’ ratio.
  • The prior trend for the hammer should be a downtrend.
  • 
  • Trading actions behind bullish hammer formation
    • The market is in a downtrend where the bears have complete control over the markets.
    • During a downtrend, each day the market will open lower than the previous day’s close and and again closes lower to form a new low.
    • On the day the hammer pattern forms, the market trades lower as expected, and makes a new low.
    • However, at the low point, some amount of buying interest emerges, which pushes up the price to such an extent that the stock closes near the high point of the day.
    • The price action on the hammer formation day indicates that the bulls attempted to break the further downside in the price, and they were quite successful.
    • This action by the bulls has the potential to change the sentiment in the stock. That’s why you should look for buying opportunities.
  • Stoploss : Low of the hammer 
  • Target :

• Hanging man (Bearish)
  • Paper umbrella that occurs at the top end of a trend.
  • A hanging man consists of a small real body at the upper end of the trading range with a long lower shadow.
  • A Hanging man indicates a market high. Hence, prior trend of hanging man should be an uptrend.
  • Top reversal pattern.
  • The longer the lower shadow, the more bearish the pattern.
  • The colour of hammer does not really matter (as open and close prices are close to each other) as long as it qualifies ‘the shadow to real body’ ratio.
  • 
  • Trading actions behind bearish hanging man formation
    • The market is in a uptrend where the bulls have complete control over the markets.
    • During a uptrend, each day the market will open higher than the previous day’s close and and again closes higher to form a new highs and higher lows.
    • On the day the hanging man pattern forms, the market trades higher as expected, and makes a new high.
    • However, at the high point, some amount of selling interest emerges, which pushes down the price to such an extent that the stock closes near the low point of the day. The bears have managed to make an entry, emphasized by a long lower shadow of the hanging man.
    • The price action on the hanging man formation day indicates that the bears attempted to break the further upside in the price, and they were quite successful.
    • This action by the bears has the potential to change the sentiment in the stock. That’s why you should look for selling opportunities.
  • Stoploss : High of the hanging man
  • Target :

Shooting star

• Shooting star is a bearish pattern which appears at the top end of the trend.
• Long upper shadow with a small lower body (Inverted paper umbrella).
• A shooting star consists of a small real body at the lower end of the trading range with a long upper shadow.
• 
• The length of the upper shadow should be at least twice the length of the real body (Shadow to real body ratio)
• The colour of shooting star does not really matter (as open and close prices are close to each other) as long as it qualifies ‘the shadow to real body’ ratio.
• The shooting star is a bearish pattern; hence the prior trend should be bullish.
• The longer the upper shadow, the more bearish the pattern.
• 
• Trading actions behind bearish hanging man formation
  • The market is in a uptrend where the bulls have complete control over the markets.
  • During a uptrend, each day the market will open higher than the previous day’s close and and again closes higher to form a new highs and higher lows.
  • On the day the shooting star pattern forms, the market trades higher as expected, and makes a new high.
  • However, at the high point, some amount of selling interest emerges, which pushes down the price to such an extent that the stock closes near the low point of the day. The bears have managed to make an entry, emphasized by a long upper shadow of the shooting star.
  • The price action on the shooting star formation day indicates that the bears attempted to break the further upside in the price, and they were actually quite successful in pushing the prices down.
  • This action by the bears has the potential to change the sentiment in the stock. That’s why you should look for selling opportunities.

• Stoploss : High of the shooting star
• Target :