Marubozu Candlestick - The Major Signals

The Major Candlestick Signals

“They teach in academies far too many things, and far too much that is useless.”

                                                                                                                        -Goethe

Candlestick signals have gained popularity in the recent years. Why, if the signals demonstrate such a high degree of accuracy, have they not been ac­tively used until recently? The common answer has been that there were too many of them to learn expeditiously and they did not always seem to work. It was a common assumption that becoming proficient at candlestick analysis required a long and steep learning curve.

Fortunately, the productive utilization of candlestick signals has revealed an important factor. Of the 50 or 60 candlestick signals, only a dozen signals need to be learned. These me considered the 12 major signals. What consti­tutes these signals being considered the major signals? Most importantly the frequency in which they occur during trend analysis!

Although the other signals me effective for analyzing reversals or continu­ations of trends, the frequency in which they occur is very small. The mental effort, to learn and remember the majority of candlestick signals, is not worth­while. Do not disregard them! It is suggested that the remaining signals be recognized. This means visually reviewing the secondary signals and the con­tinuation patterns. If the eye can be trained to recognize what appears to be a signal, it becomes more time-effective to go to a reference to verify that a candlestick signal is occurring. References would include other candlestick books that have a full description of those signals. The Candlestick Forum site pro­vides a set of flash cards that have all the signals graphically illustrated. A description of the signal is on the reverse side. Keep these near your computer screen for quick reference.

The reason for downplaying the secondary signals is simple. For every 100 occurrences of a major signal, a secondary signal or continuations signal may occur once. The occurrence of a secondary signal does not cany as much pre­dictability as a major signal. There are better trading opportunities available containing the major signals. Simply stated, the major signals will provide more trade opportunities and trend analysis situations than most investors require. The major signals incorporate an extensive amount of information relating to investor psychology Your time is best spent concentrating on learning the ma­jor signals. It will develop an immense amount of insight into why and where reversals occur.

Because of the frequent appearance of the major signals, investors are provided with more opportunities to make profits once the significance of these signals is understood. For example, a Doji represents indecision. It is a signifi­cant signal when viewed in overbought or oversold conditions. However, Doji appear quite often during a trend or during a flat trading period. Understand­ing the relationship between the Doji signal and its meaning, depending upon where it appears in a trend, produces a great advantage for an investor.

The purpose of evaluating each of the major signals in depth is for the preparation of exploiting profitable situations. When the eye recognizes a po­tential pattern, the mind can be prepared to implement the correct trading strategy The following illustrations of the major signals should help investors spot high probability situations.

Western charting has patterns that indicate reversals of major trends. Head and shoulders, double tops or double bottoms, island reversals, are a few for­mations that have exhibited high degrees of accuracy for identifying change in the current trends.

Candlestick analysis enhances an investor’s ability to prepare for trend changes. Being familiar with the psychology behind specific candle formations provides immense advantages. Candle signals can identify a trend reversal in one day. More often, the Candlestick signals can forewarn when a trend is preparing to change.

A major trend will probably not have a one-day reversal. It may take a few days or weeks for the force (psychology of investors) to expend itself and re­verse direction. The appearance of a reversal signal alerts the investor that a change of investor sentiment has or is about to occur.

Viewing a ‘sell’ signal at the top of a long up-trend should inform an investor that the trend might now be losing stream. Will the trend continue up from here? Maybe, but not with the same potential as putting your investment funds elsewhere! The trend is starting to lose steam. Quite often, a reversal of a trend can be clearly illustrated with a candlestick signal at the ultimate reversal point. Other instances may see a trend reversing slowly with the appearance of major signals occurring during the reversal pattern. In either case, being able to iden­tify a major signal in overbought or oversold conditions provides an alert sys­tem for the candlestick investor.

With these principles in mind, review the rest of this chapter. Learn to visually recognize these major signals as they will provide more trading oppor­tunities than most investors can use in a single day. Keep in mind; these signals are the results of hundreds of years of cultivation. The most important aspect of this cultivation being PROFITS! Additionally, utilizing other indicators along with candlestick signals provides a format for identifying not only profitable trades, but also the high profit trades.

The signal would have indicated that sellers were stepping in at these levels.

The force of the trend may still take prices higher. However, with the indications that the sellers may be stepping in, the strength of the up-trend should be greatly diminished. The investor can now prepare for the appear­ance of the next sell signal. Not all trends reverse immediately. Candlestick signals can illustrate when a trend is starting to lose strength.

Before going into the descriptions of the major signals, let us do a quick review of the basic candlestick formations. Japanese candlestick charting dra­matically increases the information conveyed by visual analysis. Each forma­tion., or series of formations, clearly illustrates the change of investor senti­ment. This interpretation process is not apparent in standard bar charts. Each candle formation has a unique name. Some have Japanese names; others have English names. When possible, in this book, the English name and Japanese name are given. The Japanese names are illustrated in Romanji, writing so that English-speaking people can say the names.

Single candles are often referred to as YIN and YANG lines. These terms are actually Chinese, but are used by Western analysts to account for opposites; in/out, up/down, and over/under. INN and YOH are the Japanese equivalents. YIN is bearish. YANG is bullish. There are nine basic YIN and YANG lines in Candlestick analysis. These are expanded to fifteen to cover all possibilities. The combination of most patterns can be reduced to one of these.

A long day represents a large price move from open to close. ‘Long’ represents the length of the candle body. What qualifies a candle body to be considered long? That question has to be answered relative to the chart being analyzed. The recent price action of a stock will determine whether a “long” candle has been formed. Analysis of the previous two or three weeks of trading should be a current representative sample of the price action.

The same analytical process of the long candles can interpret short days. There are a large percentage of the trading days that do not fall into either of these two categories.

Maruboza

In Japanese, Marubozu means close cropped or close-cut. Bald or Shaven Head are more commonly used in candlestick analysis. Its meaning reflects the fact that there are no shadows extending from either end of the body.

A long black body with no shadows at either end is known as a Black Marubozu. It is considered a weak indicator. It is often identified in a bearish continuation or bullish reversal pattern, especially if it occurs during a downtrend. A long black candle could represent the final sell off, making it an alert to a bullish reversal setting up. The Japanese often call it the Major Yin or Marubozu of Yin.

The White Marubozu is a long white body with no shadows on either end. This is an extremely strong pattern. Consider how it is formed. It opens on the low and immediately heads up. It continues upward until it closes, on its high. Counter to the Black Marubozu, it is often the first part of a bullish continua­tion pattern or bearish reversal pattern. It is called a Major Yang or Marubozu of Yang.

A Closing Marubozu has no shadow at its closing end. A white body will not have a shadow at the top. A black body will not have a shadow at the bottom. In both cases, these are strong signals corresponding to the direction that they each represent.

The Opening Marubozu has no shadows extending from the open price end of the body. A white body would not have a shadow at the bottom end; the black candle would not have a shadow at its top end. Though these are strong sig­nals, they are not as strong as the Closing Marubozu.

Spinning Tops are depicted with small bodies relative to the shadows. This demonstrates some indecision on the part of the bulls and the bears. They are considered neutral when trading in a sideways market. However, in a trending or oscillating market, a relatively good rule of thumb is that the next day’s trading will probably move in the direction of the opening price. The size of the shadow is not as important as the size of the body for forming a Spinning Top.

The Doji is one of the most important signals in candlestick analysis. It is formed when the open and the close are the same or very near the same. The lengths of the shadows can vary. The longer the shadows, the more significant the Doji becomes. More will be explained about the Doji in the next few pages. ALWAYS pay attention to the Doji.

Being able to recognize the basic formations creates a visual awareness of potential changes in a trend. For example, the formation of a long candle dem­onstrates more buying or selling sentiment than a normal candle. It may be simplistic but being able to recognize what the formations represent provides valuable information. A long black candle or a series of long black candles after an extended downtrend reveals important information regarding investor sen­timent.

A long black candle at the bottom of an extended downtrend should be a forewarning that the panic selling is coming into the price. It becomes time to watch for a candlestick buy signal. The same is true when long white candles start forming at the top of a trend. That reveals exuberant buying at the top. Watching for a candlestick sell signal becomes prudent.

The mainstay of candlestick analysis comes from centuries of observing what occurs when specific candlestick formations appear. The process of box­ing in the open and the close provides an immense amount of information not found in other charting techniques.

The following illustrations demonstrate where the major signals work most effectively. It will incorporate the analysis of candlestick formations leading up to a potential reversal. This is depicted by purely visual observations. The candle­stick investor has the huge advantage of visually identifying the weaknesses of human nature.

The utilization of the 12 major signals is greatly enhanced when the sur­rounding investor sentiment can be visually identified prior to a major reversal.

The remainder of this book will concentrate on how and when the major sig­nals work most effectively. That will include identifying trend formations that warn a reversal signal is potentially forming. Also, high profit patterns will be demonstrated when utilizing candlestick signals. There will not be formulas; there will not be heavy interpretations. Candlestick analysis is purely a visual evaluation. The following major signals will be explained in depth. Being able to recognize chart patterns that have high a profit potential prepares an inves­tor to take advantage of profitable trades from their inception. Learning these major signals will greatly simplify the formation of a consistently profitable trading program.

Scanning for candlestick signals makes for finding the potential of a rever­sal. However, the final analysis reverts back the visual analysis.

The following illustrations will be of the major signals. The description of these signals will be done in much greater depth than the descriptions found in Profitable Candlestick Trading. You may find some of the explanations repeti­tive. The important features of the will be repeated to insure that their rel­evance is fully understood.

THE MAJOR SIGNALS

·       THE DOJI

·       BULLISH ENGULFING

·       BEARISH ENGULFING

·       HAMMER

·       HANGING MAN

·       PIERCING PATTERN

·       DARK CLOUD

·       HARAMI – BULLISH

·       HARAMI – BEARISH

·       SHOOTING STAR

·       INVERTED HAMMER

·       MORNING STAR

·       EVENING STAR

·       KICKER SIGNAL