Day trading how to read charts
As the name suggests, a single candlestick pattern is formed by just one candle. The trades based on a single candlestick pattern can be extremely profitable provided the pattern has been identified and executed correctly. One needs to pay some attention to the length of the candle while trading based on candlestick patterns.
The length signifies the range for the day. In general, the longer the candle, the more intense is the buying or selling activity. If the candles are short, it can be concluded that the trading action was subdued. The trades have to be qualified based on the length of the candle as well. One should avoid trading based on subdued short candles.
We will understand this perspective as and when we learn about specific patterns. The Marubozu is the first single candlestick pattern that we will understand. We will understand the context of the terminology soon. There are two types of marubozu — the bullish marubozu and the bearish marubozu.
Before we proceed, let us lay down the three important rules pertaining to candlesticks. Marubozu is probably the only candlestick pattern which violates rule number 3 i. A Marubozu can appear anywhere in the chart irrespective of the prior trend, the trading implication remains the same. The text book defines Marubozu as a candlestick with no upper and lower shadow therefore appearing bald. A Marubozu has just the real body as shown below.
However there are exceptions to this. We will look into these exceptions shortly. The absence of the upper and lower shadow in a bullish marubozu implies that the low is equal to the open and the high is equal to the close.
A bullish marubozu indicates that there is so much buying interest in the stock that the market participants were willing to buy the stock at every price point during the day, so much so that the stock closed near its high point for the day.
It does not matter what the prior trend has been, the action on the marubozu day suggests that the sentiment has changed and the stock in now bullish. The expectation is that with this sudden change in sentiment there is a surge of bullishness and this bullish sentiment will continue over the next few trading sessions. Hence a trader should look at buying opportunities with the occurrence of a bullish marubozu. The buy price should be around the closing price of the marubozu.
In the chart above ACC Limitedthe encircled candle is a bullish marubozu. Notice the bullish marubozu candle does not have a visible upper and a lower shadow. The OHLC data for day trading how to read charts candle is: However in reality there is a minor variation to this definition. The variation in price is not much when measured in percentage terms, for example the variation between high and close is 1. This is where the 2 nd rule applies — Be flexible, Quantify and Verify.
With this occurrence of a marubozu the expectation has turned bullish and hence one would be a buyer of the stock. The trade setup for this would be as follows:. As it is evident, candlestick patterns do not give us a target. However, we will address the issue of setting targets at a later stage in this module. Having decided to buy the stock, when do we actually buy the stock? The answer to this depends on your risk appetite. Let us assume there are two types of trader with different risk profiles — the risk taker and the risk averse.
The risk taker would buy the stock on the same day as the marubozu is being formed. However the trader needs day trading how to read charts validate the occurrence of a day trading how to read charts. Validating is quite simple. Indian markets close at 3: If this condition is satisfied, then you know the day is forming a marubozu and therefore you can buy the stock around the closing price. The risk averse trader would buy the stock on the day trading how to read charts day i.
However before buying the trader needs to ensure that the day is a bullish day to comply with the rule number 1. This means the risk averse buyer can buy the stock only around the close of the day. The disadvantage day trading how to read charts buying the next day is that the buy price is way above the suggested buy price, and therefore the stoploss is quite deep. However as a trade off the risk averse trader day trading how to read charts buying only after doubly confirming that the bullishness is indeed established.
Here is another example Asian Paints Ltd where both the risk taker, and the risk averse trader would have been profitable. Notice day trading how to read charts the chart above, a bullish marubozu has been encircled. The risk taker would have initiated a trade to buy the stock on the same day around the close, only to book a loss on the next day.
However the risk averse would have avoided buying the stock entirely because the next day happened to be a red candle day. Going by the rule, we should buy only on a blue candle day and sell on a red candle day. What if after buying, the market reverses its direction and the trade goes wrong?
Like I had mentioned earlier, candlestick patterns comes with a inbuilt risk management mechanism. In case of a bullish marubozu, the low of the stock acts as a stoploss. So after you initiate a buy tradein case the markets moves in the opposite direction, you should exit the stock if price breaches the low of the marubozu.
Here is an example where the bullish marubozu qualified as a buy for both the risk averse and the risk taker. But the pattern eventually failed and one would have booked a loss. The stoploss for this trade would be the low of marubozu, i. Booking a loss is a part of the game. Even a seasoned trader goes through this. However the best part of following the candlestick is that the losses are not allowed to run indefinitely. There is a clear agenda as to what price one has to get out of a trade provided the trade starts to move in the opposite direction.
In this particular case booking a loss would have been the most prudent thing day trading how to read charts do as the stock continued to go down. Of course there could be instances where the stoploss gets triggered and you pull out of the trade. But day trading how to read charts stock could reverse direction and start going up after you pulled out of the trade.
But unfortunately this is also a part of the game and one cannot really help it. No matter what happens, the trader should stick to the rules and not find excuses to deviate from it. Bearish Marubozu indicates extreme bearishness. Here the open is equal to the high and close the is equal to low. A bearish marubozu indicates that there is so much selling pressure in the stock that the market participants actually sold at every price point during the day, so much so that the stock closed near its low point of the day.
It does not matter what the prior trend has been, the action on the marubozu day suggests that the sentiment has changed and the stock is now bearish.
The expectation is that this sudden change in sentiment will be carried forward over the next few trading sessions and day trading how to read charts one should look at shorting opportunities.
The sell price should be around the closing price of the marubozu. Notice the candle does not have an upper and a lower shadow. The OHLC data for the candle is as follows:. As we day trading how to read charts discussed earlier a minor variation between the OHLC figures leading to small upper and lower shadows is ok as long as it is within a reasonable limit. The trade on the bearish marubozu would be to short BPCL approximately at In this case the stoploss price is Do remember this, once a trade is initiated you should hold on to it until either the target is hit or the stoploss is breached.
If you attempt to do something else before any one of these event triggers, then most likely your trade could go bust. So staying on course of the plan is extremely crucial. Trade can be initiated based on the risk appetite of the person.
The risk taker can initiate a short trade on the same day around the closing. Of course, he has to make sure that the candle is forming a bearish marubozu. To do this at 3: If the condition is validated, then it is a bearish marubozu and hence a short position can be initiated.
Day trading how to read charts short trade will go through only by 3: This is also to ensure that we comply with 1 st rule — Buy strength, and Sell weakness. Here is another chart, Cipla Limited, where the bearish marubozu has been profitable for both risk taker, and a risk averse trader. Remember these are short term trades and one needs to be quick in booking profits.
Here is a chart which day trading how to read charts bearish marubozu pattern which would have not worked out for the risk taker but a risk averse trader would have entirely avoided initiating the trade, thanks to rule 1.
Earlier in this chapter we did discuss about the length of the candle. A small candle indicates subdued trading activity and hence it would be difficult to identify the direction of the trade. On the other hand a long candle indicates extreme activity. The problem with lengthy candles would be the placement of stoploss.
The stoploss would be deep and in case the trade goes wrong the penalty to pay would be painful. For this reason, one should avoid trading on candles that are either too short or too long.