Understanding Engulfing and Harami Candlestick Traidng Patterns

Candlestick patterns are an important tool used to analyse stocks and make investments. In the previous chapters, we have learnt about different types of bullish and bearish candlestick patterns and the kind of trends they bring about in the market. However, there are other important elements of these candlestick patterns that you must know about if you wish to keep investing money in the stock market. 

In this chapter, we will talk about the concept of bullish and bearish marubozu, and how it defines the market movements. Marubozu, a Japanese term for bald, is a candlestick with a large body and no wicks or shadows. These characteristics make it almost impossible for traders to not notice them. The long and sturdy body indicates a very strong upward or downward movement in stock prices. 

Bullish and Bearish Marubozu

The Marubozu candlestick pattern includes a single candlestick that showcases the movement of the market in a particular direction without any significant resistance from the opposing trend. This leads the closing to happen at a high or a low. 

There are two types of Marubozu: Bearish Marubozu and Bullish Marubozu

Now, let’s have a look at how both of them differ from each other. 

Bullish Marubozu: In the case of a bullish marubozu, the pattern features a long green candle with no shadows on both ends. Hence, the opening price depicts the market low and the closing price showcases the market high. The pattern becomes very strong if you spot it at the end of a downtrend. It is an indication that the bulls are back in the market and they are here to stay. 

Bearish Marubozu: A bearish marubozu is the bearish equivalent of a bullish marubozu. Here, the pattern comprises a long red candle with no shadows on both ends. Here, the opening price of the timeline showcases a high while the closing price is the market’s low. 

If you spot a bearish marubozu, it indicates that the sellers have taken over the market and are driving the market downwards strongly. A bearish marubozu might also mean that the market will see a downward trend for a long period of time. 

Reading a Marubozu Pattern 

If you want to use the marubozu candlestick patterns to study the market, here are a few tips that will come in handy. 

• Volume: The pattern is a common occurrence where the trading volume is higher than the average. Hence, there is a strong buying interest in the market. 
• Resistance/Support: A bearish marubozu becomes more conclusive if the price breaks above the key resistance levels. Similarly, a bullish marubozu accurately shows a market trend when the price breaks below a support level. 
• No Gaps: If there are no significant gaps in the market when you spot a Marubozu, the stock might experience a smooth movement, making the pattern even more trustworthy. 
• Market Sentiment: When a bullish marubozu is coupled with positive news, the candlestick and the trend it brings about becomes more reliable. 
• Other Tools: While a marubozu indicates trade reversal, you must try to be doubly sure before you act on it. Try looking out for the next candlestick pattern or use other technical tools to ensure that the pattern is reliable. 

Doji and Spinning Top Candlestick Patterns

There are a few other concepts that you must know about in conjunction with the marubozu to understand the market better. Doji and spinning top candlestick patterns are a few of them. Let’s try to understand both of these patterns in detail. 

Doji 

Doji is a Japanese word which translates to error. In case of a doji, the opening and the closing price of the stock is the same, making it look like an error. The candle is short, showing a limited trading range. There are different types of doji candlesticks - plus, cross and inverted cross. 

A doji signifies confusion or hesitation in the market as the investors are unable to predict the market trend. The price of the stock is an important indicator of how the market will behave. As the opening and the closing price remains the same, there are high chances of trend reversal. 

Spinning Top 

The spinning top is an important candlestick pattern that gives a clear indication of the market state. Here, the candlestick is characterised with a small body with long shadows. Here, both buyers and sellers try to take control of the market. However, the closing price is quite close to the opening price. 

These candlesticks indicate a shift in the market trend. The peak might suggest that the bulls are losing control of the market. Also, the long shadows indicate that the market has experienced multiple changes within a short time frame. 

As the candle has a small body, the opening and the closing prices are very close to each other. While the bulls try to push the price higher, they fail to bring about the desired results. Similarly, the lower wick indicates that the bears tried to push the market down, but they failed to do so. 

While both doji and spinning tops might indicate similar trends, they differ from each other in some aspects. Both of these candlesticks depict uncertainty. However, dojis are small with almost no upper and lower shadows, and the spinning body comes with large upper and lower shadows. 

As both of these candlesticks indicate market hesitation, it is important for the investors to look out for the next major indication before placing a trade. 

Hammer and Hanging Man

Both of these candlestick patterns play a very important role in understanding the market. Let’s try to understand the market implications of these patterns and how they differ from each other. 

Hammer 

A hammer or a bullish hammer can be spotted at the bottom of a trend. It is characterised by a small body with a long lower shadow. A hammer showcases a bullish trend if the lower shadow continues to increase. 

If you spot a hammer, the market is predicted to trade at a lower price on that day. However, a bit of buying interest pushes the price a bit higher, and the stock closes at a high. 

Hanging Man

A hanging man or a bearish hanging man is another important candlestick pattern that indicates a trend reversal. It is known as the hanging man as it occurs post a market high and is followed by an uptrend. 

The pattern shows that the market is experiencing selling pressure. The preceding uptrend shows how bulls have taken over the market. However, as soon as the hanging man appears, the bears come back into the picture, and the market closes at a lower price point. 

Difference Between Hammer and Hanging Man

Now that you have a fair bit of understanding of what a hammer and a hanging man is, it is important to know how these similar candlestick patterns are different from each other. 

• The pattern of a hammer looks like an actual hammer - a small body and a longer lower shadow. Similarly, the hanging man candlestick pattern looks like a hanging man between two candlesticks.
• While the hammer is a bullish reversal pattern, the hanging man is a bearish reversal pattern.
• You can spot a hammer at the end of a downtrend, which is known as the support level. However, a hanging man is formed at an uptrend, and it showcases resistance. 
• The hammer can be considered as an entry point to the trade, while the hanging man often acts as an exit point. 

In Conclusion

The marubozu candlestick patterns form a very important part of candlestick analysis. They are actively used to understand market sentiment and to determine the length of the trend. 

Spotting a marubozu pattern is very easy as they are characterised by a long body with almost no shadows. Also, it indicates that the market has now become one-sided, and the price will either continue to grow or fall based on the pattern if there are no signs of trend reversal. However, you must try to interpret a marubozu candlestick along with other technical indicators for optimal results.  Stay tuned for our next chapter on candlesticks in trading.