Candlestick patterns and their significance- Shooting Star and Marubozu

Understanding a candlestick

A candlestick displays the open, close, high and low price of the underlying asset for a time period. In a typical candlestick chart, each candlestick represents a specific time period, such as a day, a week, or an hour. The colour of the candlestick can indicate whether the price of the asset rose or fell during that time period. A green or white candlestick indicates that the price rose, while a red or black candlestick indicates that the price fell.

Simply, a candlestick has 5 factors; High, low, close, open and the body.

Let us look at a couple of the candlestick patterns and their significance:

 1. Shooting star

The "shooting star" pattern appears at the peak of an uptrend; its long upper wick indicates that resistance to further bullish movement has been observed above the close, and a bearish reversal is possible.

The Shooting Star, as its name implies, is a bearish reversal pattern that develops following an advance and in the star position.

Market view

When prices open with a gap up, rise throughout the trading day, and close far from their highs, a shooting star is formed. The resulting candlestick has a small, green or red body and a long upper wick. To indicate a substantial reversal, the upper wick is relatively long and at least 2 times the length of the body. The long upper shadow suggests that buyers were able to push prices higher during the trading session, but selling pressure eventually overwhelmed them, causing prices to close near the session low. This indicates that the bullish momentum may be fading, and bears may be gaining control.

Criteria

• The candlestick must have a small real body near the lower end of the range for the day.
• The candlestick must have a long upper shadow, at least twice the length of the body.
• The lower shadow should be small or non-existent.
• The candlestick must occur after an uptrend.

Trade setup

• The longer the upper wick, the higher the chances of a reversal occurring.
• A gap up from the previous day's close sets up for a stronger reversal move provided
•  the day after the Shooting Star opens lower.
• Large volume on Shooting Star day increases the chances that a blow-off day has occurred, although it is not a necessity.
• The following day should confirm the Shooting Star signal with a red candle or a gap down with a lower close

2. Marubozu

A "marubozu" represents a strong continuation of the current trend. Marubozu does not have upper or lower wicks, and the high and low are represented by the open or close.

Market view

A green Marubozu forms when open=low and close=high. This indicates that buyers controlled the price action from the first trade to the last trade. Red Marubozu forms when the open=high and close=low. This indicates that sellers controlled the price action from the first trade to the last trade.

Criteria

• The candlestick must have a long real body with little or no wicks on either end.
• The candle can be green or red, and it can appear anywhere on the chart.
• A green Marubozu moves upward and is very bullish, and a red Marubozu moves downward and is very bearish.
• The longer the candle is, the more dramatic the jump in price has been (whether it jumped up or down).

Trade setup

• As marubozu indicates

1. a continuation of the trend, therefore a green marubozu candle indicates bullishness and a red marubozu candle indicates bearishness in the market.
2. In case of an uptrend, it is advisable to enter a trade around the closing price of a bullish marubozu and keep the stoploss at the low of the marubozu candle.

• In case the markets moves in the opposite direction, exit the trade if price breakes the low of the marubozu.
• In a bearish market, sell around the closing price of a bearish or red marubozu and setting the stoploss at the high of the marubozu candle.
• A short marubozu candle signals subdued activity in the market, whereas a long marubozu candle signals extreme market activity.

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