The trader's dilemma: Even when you see a strong reversal pattern on a chart, how do you know it's the real thing? The answer is that any indicator needs to be independently confirmed. This is where East (candlesticks) meets West (traditional technical analysis).
One of the favorite reversal signals used by day traders and swing traders is the volume spike. This applies especially on sessions with an unusually small trading range, the so-called narrow range day (NRD). So an NRD with heavy volume is viewed as a strong two-part signal that the current trend is about to turn around.
The problem with these signals is that they do not always come through. Failed signals are fairly common, so astute swing traders have to look for separate confirmation. But this raises a second dilemma: If you wait for confirmation, it's probably going to be too late to make an entry decision before the new trend begins. This is where the Marubozu comes into the scene.
In Japanese, Marubozu means "with little hair." It is called this because it is a long session but with little or no upper or lower shadow. A long session means a bigger than usual gap between opening and closing prices; and the lack of shadow means trading for the day remained mostly within the range between the opening and closing price.
A white Marubozu (meaning price opened at the bottom and closed at the top) is one of the most bullish single-session candlesticks. Of course, the black variety (seen when price opened at the top of the rectangle and closed at the bottom) is one of the most bearish single-session indicators.
The Marubozu is extremely valuable as a confirming session because it often precedes the traditional NRD and volume spike. So confirmation is given to you before the better-known turning point. When a downtrend ends, you see three signs:
1. The white Marubozu.
2. An NRD in the following session.
3. A volume spike in the same session as the NRD.
When an uptrend ends, you see the same three developments, but with a black Marubozu. In both cases, confirmation takes place in anticipation of the turn, and before the NRD/spike session.
Candlesticks are enjoying great popularity today, but they often are misunderstood. They are not effective as a replacement for the older Western technicals, based on price action and trading range analysis. The core of the Western approach is support and resistance and how price patterns work within the range, or when price breaks through above or below that range. This core continues to provide you the best insight to price action and candlesticks do not replace that. Rather, candlesticks work best when they confirm what traditional technical signals forecast. Used together, East and West create a powerful and effective method for timing entry and exit as part of a swing trading strategy. The single-session candlestick is only the starting point. Two-session and three-session indicators provide equally important insights to coming price tendencies - never as 100% guarantees, but tools to vastly improve your timing success.
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