Black Marubozu

How To Identify?

The distinct features of a Black Marubozu pattern make it easily identifiable. Let us look at those characteristics below:

• Single-Candle Pattern: It is a single candlestick pattern.
• Black/Red Body: The candlestick is red or black in color, depicting a downward price movement. In other words, it is a bearish candlestick.
• Little to No Wick: The shadows are either absent or extremely small, representing the sellers’ strength in the trading session.

How To Read?

Let us look at the following 1-day Piramal Enterprise chart to understand the interpretation of such a candlestick.

Source

The above TradingView chart shows the formation of a black or bearish marubozu candlestick on September 22, 2023. It shows that the bears were in complete control on that day as they pushed the price downward. This is the marubozu open variant, as there was no upper wick but a lower shadow. This means the open and the day’s high were the same, i.e., ₹1,136, and the day’s low (₹1046.65)  was very close to the closing price recorded in that trading session.

As one can observe in the above chart, the patterns appear at the end of an uptrend, thus indicating a potential trend reversal. As we can see, there was no clear confirmation that a downtrend had materialized. Hence, it is vital to consider other indicators, like volume, Relative Strength Index (RSI), etc., to make buy or sell decisions.

How To Trade?

Let us look at some popular strategies to trade such patterns.

1. Pullbacks On Naked Price Charts 

This strategy involves waiting for a pullback to begin and then identifying the bearish marubozu pattern. The pattern often confirms the pullback’s end and the beginning of a downside move. 

2. Trading With Resistance Levels 

If individuals wish to utilize this strategy, they can follow these steps: 

• Draw the resistance levels on the financial instrument’s price chart. 
• Wait for the security price to increase and get to the resistance level. 
• Observe and verify whether the formation of bearish Marubozu has occurred at that level. 

Lastly, enter a short position, anticipating a downside move once the price breaks Marubozu’s low. 

3. Trading With Relative Strength Index Divergences

This trading strategy involves the following steps: 

• Spot an upward trend. 
• Mark all the highs that the security’s price makes, following each leg toward the upside 
• Simultaneously, compare those highs using RSI. 
• If RSI makes lower highs while the asset price makes higher highs, it is a sign of divergence. 
• Wait until a bearish Marubozu forms at a higher high that is aligned with a relative strength index lower high. 
• Enter a short position when the security’s price breaks the bearish Marubozu’s low. 

When using any of the above strategies, one must consider using stop-loss and take profit orders to limit losses and secure gains. 

Frequently Asked Questions (FAQs)