Bullish and Bearish Marubozu Patterns

The ability to predict price movements in the financial markets is the same as possessing a golden key to profitability. Among the various tools traders use to analyze and forecast market prices, candlestick patterns stand out for their ability to display the psychological fight between buyers and sellers in a visual form. One such pattern that we will discuss today is the Marubozu candlestick.

The term “Marubozu” originates from the Japanese language, where it translates to “bald” or “shaved head.” This name is fitting for the pattern, as it lacks the upper and lower shadows.

Whether you are day trading and eyeing minute-to-minute fluctuations or long-term investing with the weekly charts, understanding Marubozu patterns can offer you the edge you need in the markets.

In this article, we’ll unravel the anatomy of the Marubozu pattern, distinguish between its various types, and then explore some actionable trading strategies that leverage the power of Marubozu candlesticks. By the end, you won’t just grasp the significance of a Marubozu candle; you’ll also learn how to seamlessly incorporate this knowledge into your trading toolkit.

Bullish Marubozu Pattern

A Bullish Marubozu pattern is characterized by a long green (or white) candlestick with no shadows protruding from either end—just body mass all the way. The opening price is equal to the low for the period, while the closing price is similar to the high.

The Bullish Marubozu is especially powerful when it forms at the end of a downtrend or breaks through a resistance level. In these cases, it acts like a green light for the bulls, signaling that it’s their turn to run the show.

What Does a Bullish Marubozu Pattern Look Like?

Here is a great example of a bullish Marubozu on the Netflix daily chart, signaling a trend continuation:

The Marubozu candlestick that formed in the graph above on March 1, 2010, is a textbook example of the pattern. The opening price matched the day’s low at $9.43, while the closing price aligned perfectly with the day’s high at $9.96. Though this is an ideal setup for a Marubozu, keep in mind that even if the final digits aren’t precisely identical, the pattern can still be considered valid.

Bearish Marubozu Pattern

A Bearish Marubozu pattern is identified by a long red (or black) candlestick that lacks upper or lower shadows. The opening price for the period coincides with the high, while the closing price aligns with the low. When you spot a Bearish Marubozu, it’s a sign that sellers are not only in control but are also driving the market downwards with significant force. There’s little to no buying interest, and it often suggests that a continued downward trend is more likely than not.

What Does a Bearish Marubozu Pattern Look Like?

The ETH/USD hourly chart below presents a good illustration of a Bearish Marubozu pattern. When observed within a downtrend, this pattern denotes a significant selling pressure, and traders should anticipate further declines in price for that specific asset.

Even though the last decimal of the low price differs slightly from the close price, this pattern is considered valid.

Marubozu Strategy Ideas

Before we dive into strategies, here are some tips to increase the reliability of the Marubozu candlestick patterns:

High Volume: The pattern should occur on higher-than-average trading volume, which confirms strong buying interest.

Break of Resistance/Support: The Bullish Marubozu pattern is more reliable if it coincides with the price breaking above a key resistance level. And on the other hand, the Bearish Marubozu pattern is more accurate when price brakes below a support level.

Look for Extra Confirmation: A subsequent candlestick pattern or other technical indicator(s) can strengthen the pattern’s reliability.

Market Sentiment: Positive news or strong earnings reports that coincide with the appearance of a Bullish Marubozu can strengthen its reliability.

No Gaps: The absence of significant gaps in the chart can indicate smoother sailing for the stock, making the pattern more reliable.

Strategy 1: Bearish Marubozu, Trend & 50 EMA

One effective strategy for trading Marubozu candlestick patterns is to use them in the context of a prevailing trend that has already been established over an extended period of time.

Trend trading is perhaps one of the most tried and true methods in the world of trading, especially when combined with other indicators like the 50-day Exponential Moving Average (50 EMA).

Here’s how you can use this combined strategy:

Identify the Trend

Before you even consider a trade, you need to establish what the prevailing trend is. This can be a bullish or bearish trend, identified by observing the price action over a defined period.

Apply the 50 EMA

Apply a 50 EMA on your chart. The 50 EMA will help you identify the medium-term trend and provide dynamic support and resistance levels.

In our example, we identified a clear downtrend in the GBP/USD hourly chart. The price develops below the 50 EMA (represented by the blue line on the chart), it forms higher lows and lower lows, and this confirms the bearish sentiment.

Wait for a Marubozu Candlestick

Now we have to wait for a Marubozu candlestick pattern to form. In the context of a bearish trend, you’re looking for a Bearish Marubozu pattern.

In the GBP/USD hourly chart, there is a perfect Bearish Marubozu formed below the 50 EMA. At this point we can consider short selling the British Pound with a stop loss somewhere above or close to the 50 EMA to limit potential losses if the trade goes wrong. In our hypothetical example a 4.5 Risk/Reward ratio would result in a massive gain.

Now let’s recap the rules of this strategy:

1. Find a strong prevailing trend (in our case we found a downtrend).
2. Price has to trend below the 50 EMA.
3. Wait for a Bearish Marubozu pattern to form.
4. Enter right below the pattern on the next candle.
5. Set stop loss above the 50 EMA.
6. Take profit at 1:1 R/R ratio or even higher.

Always remember, no strategy guarantees 100% success; it’s all about probabilities and managing risk effectively. Before deploying this strategy with real capital, consider backtesting it on historical data to see how well it would have performed. This will give you a better understanding of what take profit and stop loss is most effective for your scenario.

Strategy 2: Bullish Marubozu and Guppy Multiple Moving Average (GMMA)

This strategy incorporates the Marubozu pattern with a more complex cluster of moving averages called Guppy Multiple Moving Average (GMMA).

GMMA is a technical indicator developed by an Australian trade named Daryl Guppy and it consists of 2 different sets of exponential moving averages (EMAs) that represent the short-term and long-term trend of the market.

The short-term GMMA is composed of four EMAs with periods of 3, 5, 8, 10, 12, and 15.

The long-term GMMA is composed of six EMAs with periods of 30, 35, 40, 45, 50, and 60.

According to Daryl Guppy, the short-term GMMA captures the thinking and behavior of short-term traders and the long-term GMMA represents the behavior of investors—the smart money.

The GMMA is used to identify the strength and direction of a trend in the market. In an uptrend, the short-term moving averages are above the long-term moving averages, and they indicate that the bullish momentum is increasing. In a downtrend, the short-term moving averages are below the long-term moving averages, and they indicate that the bearish momentum is increasing.

In our strategy, we are looking for setups where the short-term moving averages are perfectly positioned above the long-term moving averages.

Then, we are looking for a retracement where the short-term EMAs act as support. So the price should not close anywhere below the short-term EMAs.

In the chart below we can see a strong uptrend developing on Apple stock. The short-term EMAs are aligned above the long-term EMAs. In our chart, blue lines are the short-term EMAs and red lines are the long-term EMAs.

After the first retracement of the uptrend a Bullish Marubozu formed on the APPL daily stock with the 12 EMA acting as support. 

At this point, all the conditions of our strategy are met and we can look for a long position with an entry above the Marubozu candlestick pattern. To mitigate the risk of potential losses, a stop loss order can be placed below the long-term EMAs.

In our example, this trade would generate a massive gain with a 1:5 Risk/Reward ratio before a major retest would take place.

The rules of this strategy:

1. Find a strong uptrend. Short-term moving averages have to be perfectly positioned above the long-term moving averages.
2. Price has to retrace and short-term EMAs need to act as support. Meaning the price should not close below the short-term GMMA.
3. Wait for a Bullish Marubozu pattern to form at the support area.
4. Enter right above the pattern on the next candle.
5. Set stop loss below the long-term GMMA.
6. Take profit at 1:1 R/R ratio or even higher.

Strategy 3: Bearish Marubozu and Bearish Pin Bar Patterns

This strategy combines the Bearish Marubozu and Bearish Pin Bar patterns and it’s about waiting for both patterns to appear on a chart before entering a short trade.

A Bearish Pin Bar is formed when the price initially moves up, but is then rejected and pushed back down, resulting in a long upper wick and a small body located near the lower end of the candlestick. This pattern indicates that buyers attempted to push the price up, but failed, and sellers took control again, creating a bearish sentiment in the market.

Combining the Bearish Marubozu and Bearish Pin Bar patterns in trading can provide a powerful signal to enter short positions in the market.

A great example of this trading setup can be observed in the NFLX hourly chart below, where a Bearish Pin Bar was formed at the end of an uptrend, followed by a Bearish Marubozu.

At this point a strong short sell signal triggered and pushed the market into a downtrend. Placing a stop loss above the high of the Pin Bar could have resulted in a massive profit.

Conclusion

The Marubozu candlestick pattern is a useful tool for assessing market sentiments and signaling a continuation of the current trend. While identifying the Marubozu pattern is straightforward, its effectiveness depends on analyzing its position within the trend. It is highly recommended to combine it with other technical indicators or candlestick patterns to cut through the market noise for optimal results.

Disclaimer: All investments involve risk, and the past performance of a security, industry, sector, market, financial product, trading strategy, or individual’s trading does not guarantee future results or returns. Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on an evaluation of their financial circumstances, investment objectives, risk tolerance, and liquidity needs. This post does not constitute investment advice.