A Trade A Day

There is a lot of material on candlestick charts and patterns in general, but I want to take time to illustrate the ones I think are most important and how I use them.

The pattern I want to discuss today is the marubozu. The marubozu is formed when the day’s trading range is dominated in one direction. A true marubozu candle has no shadow. This is significant because a solid candle(green on my charts) indicates that buyers were in charge all day long. The opposite being true if the candle is hollow(red on my charts), signifying the sellers were in charge for the entire trading session.

The reason why a marubozu is important is because it signifies an extreme. Extremes mean opportunity. It is not often you get such buying that the price is driven in one direction all day long.

Marubozu are a strong candlestick by themselves, but their real power comes from the patterns they create. There are two ways I trade a Marubozu. The first opportunity is when a Marubozu occurs and consolidation follows.

In order to understand why this is significant, you need to remember that the stock market works on supply and demand. A Marubozu has just demonstrated a enormous jolt of demand. Now as the stock consolidates, we look for a setup above the consolidation. Demand has become apparent through the appearance of the marubozu. Now it’s just a matter of a continuation of this demand

The second way in which I use a marubozu is when they occur two or more days in a row. Marubozus are rare. If you see true marubozus two or more days in a row, you are doing well. However, the pattern I’m describing typically consists of an opening or closing marubozu and then more long candles with very small shadows.

The setup here is based off extremes. The stock moves two or more days down with a marubozu and other “marubozu like” candles. My setup occurs when the trend changes abruptly. The most desired setup is for a marubozu in the opposite direction. The higher the opening, the better. The logic behind this is we’ve had an extreme move in one direction and then a sudden reverse in the other direction. If the stock was moving down and the reverses up, I can trap the sellers. If the stock was moving up and reverses down, I trap the buyers.

What’s important to keep in mind when looking at this pattern is the psychology. Check out GOOG from 1/25/05

GOOG had three very strong down days in close proximity to each other. The stock was essentially in a trading range, but that didn’t stop the bears from trying into push GOOG lower. However, after three consecutive days of decided lower price, the stock reversed on 1/26/05. In this instance the short term bears were trapped by the big up move in GOOG. One interesting note is that volume was not heavy on 1/21, 1/24, and 1/25.This would have been an indicator that the sellers didn’t have the conviction that the downswing would indicate.

Candlestick charts give a trader a lot of information. There are many patterns and I don’t have time to memorize them all. However, the marubozu is a candle stick pattern worth your time to know.

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