Bullish and Bearish Candlesticks
Bullish and Bearish Candlesticks
When the closing price of the candlestick is greater than the opening price, then the candle is a bullish candlestick
and is represented by a white or green candlestick real body.
Conversely, if the closing price is less than the opening price, then
the candlestick is a bearish candlestick and is represented
by a black or red candlestick real body. Throughout the finvids.com
site, the words bull or bullish candlestick (shown by a green
candlestick) and bear or bearish candlestick (shown by a red
candlestick) will be used.
Real Body and Upper and Lower Shadows
The rectangular area between the opening and the close of a session of trading is called the real body. The thin lines that look like candle wicks above and below the real body are called shadows. The shadow above the real body is called the upper shadow,
the top end of the upper shadow corresponding to the high of the
session of trading, and the shadow below the real body is called the lower shadow, where the bottom end of the lower shadow corresponds to the low of the session of trading.
Bullish Candlestick
When discussing trading sessions based on a trading day (morning
to afternoon), generally speaking the two most significant times of the
trading day are the opening and the close. The opening and the close
create the real body of the candlestick; hence, the most important part
of a candlestick is the real body. By looking at a candlestick, a
person can quickly tell whether traders were eagerly buying throughout
the day (bulls were in charge for the trading day) - the candlestick is
green, or whether traders were eagerly selling throughout the day (bears
dominated the trading day) - the candlestick is red. By looking at the
size of the real body of the candlestick, a trader can tell if the bulls
were significantly in charge of the trading day (a tall green
candlestick) or only moderately in charge of the trading day (a small
green candlestick). Similarly, if a trader sees a large red candle, he
or she can assume that the selling pressure of the bears overpowered the
bulls for the day; however, if the candlestick is very small and red,
then the trader can see that the bears were only slightly more powerful
that day than the bulls. In summary, the real body of a candlestick can
summarize the outcome of a period of trading in an easy to see way –
green = bulls win the trading session, red = bears win the trading
session; and the height of the candle equals the margin of victory for
the bulls or the bears.
Steve Nison (1994) states that “for a [bullish] candle to have
meaning, some Japanese candlestick traders believe that the real body
should be at least three times as long as the previous day’s real body.”
(p. 20). Roads (2008) suggests the following: “determine the area
covered by the difference between the close and the open. If it’s at
least 90 percent of the area covered by the difference between the high
and low, you have a long white candle” (p. 76). An example of a
computer charting package’s definition is: “Its Close price is higher
than the Open price; Its body is longer than each shadow; Its body is
longer than the average body size calculated for the specified number of
preceding candles” (ThinkorSwim, 2011).
Bullish Marubozu
There are specific versions of the bullish candle. The first is a very bullish candlestick called the bullish marubozu.
The rough translation of marubozu is “bald or little hair” (Rhoads,
2008, p. 74). A marubozu is bald or has little hair because a marubozu
has no upper or lower shadow, or at least a very small upper and/or
lower shadow. This is the most extreme form of the bullish candlestick
because bulls were in charge from the opening to the close; bears were
unable to push prices below the opening price and the trading session
ended with bulls still buying pushing prices upward until the close.
Closing Bullish Marubozu
A less bullish version, but nevertheless still bullish, is the closing bullish marubozu.
With the closing marubozu, prices opened, but during the trading
session, bears were able to push prices low enough to make a new low;
however, bulls returned and kept buying and rising prices until the
close of the day. The closing marubozu has no upper shadow because the
close of the trading session is also the high of the trading session.
Opening Bullish Marubozu
The final version of the bullish marubozu is the opening bullish marubozu.
The opening marubozu opens and continues higher throughout the day,
never going below the opening price. Unfortunately for bulls, prices
rise to a point where bears come in and are strong enough to push prices
lower to the close. The fact that bears were able to possess enough
power to push prices lower makes this candlestick pattern less bullish
than the regular marubozu where bulls started the day in control and
ended the day in control.
Bearish Marubozu
In contrast, the bearish marubozu occurs when prices
open and immediately there is selling, this selloff continues until the
close when selling pressure from the bears makes the close the low of
the trading session. The bearish marubozu should have no upper or lower
shadow.
Closing Bearish Marubozu
The closing bearish marubozu opens, but during the
trading session bulls are able to move higher past the opening price and
make an upper shadow; however, bears take over and for the rest of the
trading session, bears push prices downwards making the closing price
the low of the trading session as well.
Opening Bearish Marubozu
Though still very bearish, the opening bearish marubozu
is less bearish than the previous two marubozu’s because during the
trading session, bulls are able to repel the bears, thus pushing the
closing price higher than the low reached during the session.
Normally,
one single candlestick is not enough justification to make a trade.
However, there are instances when a single candlestick can provide
confirmation of a support or resistance line, a trendline, a moving
average, or a breakout.
Normally, one single candlestick is not enough justification to
make a trade. However, there are instances when a single candlestick can
provide confirmation of a support or resistance line, a trendline, a
moving average, or a breakout.
Bullish Candlestick Confirming Support
In the chart above of the S&P 500 Exchange Traded Fund (ETF)
the blue support line is confirmed with large bullish candlesticks. It
can be inferred from these large bullish candlesticks that bulls are
entirely in charge of the market at the price around the support area.
An informed trader would also notice that these two strong bullish
candlesticks have created a double bottom chart pattern.
Bearish Candlestick Confirming Resistance
The chart above of the Energy SPDR ETF (XLE) shows that whenever
prices reached the area of resistance, shown with the blue line above,
bears came in to sell and were able to create long bearish candles
downward off of the resistance line. It can be inferred from the chart
that either bulls were unable or unwilling to try to push prices higher
past the resistance area or the bulls were overwhelmed by the selling
pressure of the bears. Either way, the resistance line was defended and
kept intact.
Bullish Candlestick Confirming Uptrend
The chart above of the Dow Jones Industrial Index ETF (DIA)
shows that each time the prices reached the upward sloping trend line a
large bullish candlestick was formed. Bulls were very willing to buy
the Dow Jones Industrial index at this trend line and were able to keep
the upward trend intact. Similarly, bears were unwilling or unable to
sell into the area of the upward sloping trend line, thus keeping the
upward trend unbroken.
Bearish Candlestick Confirming Downtrend
Notice in the chart above of the Silver ETF (SLV) that price
movement up into the downward trend line was met by large bearish
candlesticks. In fact, every large bearish candlestick off of the
downward trend line set the stage for at least a week of subsequent
lower prices.
Bullish Candlestick Confirming Moving Average
Bullish candlesticks can be used to confirm the validity of
common moving average support lines. In the chart above of the Energy
SPDR Index ETF (XLE), the commonly used 50-day simple moving average was
confirmed multiple times by large bullish candlesticks. Every time the
prices moved into the area of the upward sloping 50-day moving average,
the bulls appeared pushing prices higher and initiating multi-week
uptrends before returning back to the moving average to once again be
defended by yet another bullish candlestick.
Bullish Candlestick Breaks Overhead Resistance
A large bullish candlestick rising through overhead resistance
can signal resistance has finally been broken. Especially when combined
with large volume, a large bullish candlestick piercing through
overhead resistance can signify that a new trend upward is about to
begin. A 7-month consolidation in the Gold ETF (GLD) was broken with a
large bullish candlestick. Bears were unable to repel this strong
showing of the bulls, and for the next few months the trend was almost
completely up.
Bearish Candlestick Breaks Below Support
The chart above of the S&P 500 ETF (SPY) shows a large
bearish candlestick penetrating through the support line and closing
below the support line. In fact the candlestick that broke through the
support area was a closing bearish marubozu, meaning that bears pushed
prices down to the very end of trading, bull were unable or unwilling to
step in to buy at the support area like they did previously. This is a
sign that the status quo is about to change, which was confirmed by a
steep drop the next few trading days. Also notice the bull candle the
following day – the bullish candlestick was unable to go above the
recently broken support line. In fact, bears were now willing to sell or
short to defend this historical support line which now becomes the
overhead resistance line.
Bullish Candlestick Acting As New Support
Sometimes a strong bullish move upward resulting in a large
bullish candlestick can be overdone, having moved too far too fast and
becoming overbought. However, there are times when this large bullish
candlestick can act as support for these retreating prices. The chart
above of the Gold ETF (GLD) shows two instances of the opening of the
large bullish candlestick acting as price support over time. As was
taught previously, a large bullish candlestick is created when prices
reach a level where bulls feel confident buying and bears are either not
willing or are incapable of pushing prices lower. When prices later
reach that same price level, bulls feel confident once again to buy;
therefore, confirming an area of support.
Bearish Candlestick Acting As New Resistance
Long bearish candlesticks are typically oversold and consequently
are subject to bullish reversals. However, the opening of the large
bearish candlestick can sometimes be used as a new resistance level. As
can be inferred from a large bearish candlestick, the bears were
confident in selling at the area of the open of the large bearish
candlestick; in addition, the bulls were unable or unwilling to buy and
thus the bears were able to sell without much opposition throughout the
entire trading day. When prices begin to move upward over time entering
into the price levels where the long bearish candlestick was formed,
the same price level is finally reached where previously the bears were
able to strongly sell and the bulls were unable to push prices higher.
Thus, an overhead resistance is created. The chart above of the Utility
SPDR (XLU) illustrates how the opening of the long bearish candlestick
acted as resistance for future prices.
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