Candlesticks: anatomy and reading

According to a popular story, the first chart drawn with candles was made in the eighteenth century by a Japanese rice trader from Sakata, Munehisa Homma. He wanted one thing: to see in a single glyph who had won the day, buyers or sellers. Today anyone who opens a chart in a brokerage app has that glyph in front of them, yet few people really read it. And it is one of the quickest skills you can acquire.

What you will learn

• which four prices a candle is made of and what its parts mean,
• how to read from a candle's shape who won the session and by how much,
• why a single candle without context is just noise.

Four prices in one glyph

Every candle describes one interval of time: a minute, an hour, a day, a week. It records four prices:

• open (O): the price of the first trade in that interval,
• high (H): the highest price the market saw,
• low (L): the lowest price,
• close (C): the price of the last trade.

Four numbers make a shape. The body (the thick part) stretches between the open and the close. The wicks (thin lines, also called shadows) reach from the body to the high and to the low. If the close is above the open the candle is bullish (usually green or white); if below, bearish (usually red or black). In Asia the colours are sometimes reversed, so always check the legend.

For the sake of order, a few simple formulas:

• candle range: H − L,
• body size: |C − O|,
• upper wick: H − max(O, C),
• lower wick: min(O, C) − L.

What the shape says

The body shows who had the upper hand at the end of the session, and the wicks show how far price travelled before being pushed back. It helps to picture a tug of war:

• Long body, short wicks: one side controlled the session from start to finish. A strong bullish candle says: buyers pushed all day and could not be pushed back.
• Small body, long wicks on both sides: both sides tried, neither won. The market is hesitating.
• Long upper wick and small body: buyers pushed price high, but sellers pushed it back. The move up was rejected.
• Long lower wick and small body: the other way round, sellers pushed price low but buyers bounced it back.
• Doji (open and close almost equal): a draw. On its own it means nothing, but after a long move it can warn that strength is fading.

Notice that wicks are more interesting to an analyst than bodies: they show a move that tried to happen and was rejected. That is information you cannot see on a line chart, because a line chart shows closing prices only.

The timeframe changes the story

A daily candle is a whole session in one glyph, while an hourly candle is only a fragment of it. The same day can look like a calm green body on the daily chart and like a scuffle with three plot twists on the hourly one. There is no single "right" timeframe. The longer it is, the more information a single candle carries and the less chance it contains. A weekly candle is the result of five sessions and tens of thousands of decisions, while a one-minute candle is a handful of orders.

Chart example: Tesla (TSLA), daily chart

Tesla shares are known for big daily swings, so the candles on its daily chart have clear bodies and long wicks, which makes ideal learning material. Open the daily chart for the last three months and find three kinds of candle: one with a long body and short wicks, one with a small body and a long upper wick, and one that opens with a clear gap from the previous close.

For each, try to tell in a single sentence what happened that day: who pushed, who gave way, whether the day ended "with a bang" or "with unfinished business". If you can do that, you already read candles better than most of the people who draw them.

How it fails

• A single candle without context is noise. A long upper wick at resistance means something quite different from the same wick in the middle of a consolidation. Always ask: where is this candle relative to the trend and the key levels?
• On short timeframes chance dominates. A few big orders can paint an impressive one-minute candle that means nothing.
• The close is not everything. Many markets have sessions outside main trading hours. The close of a daily candle depends on how the platform defines the session. Check it in the settings.
• A pretty shape is not a signal. Giving a candle a fancy-sounding name does not give it predictive power.

Check yourself

1. Which four prices does a candlestick consist of?
2. A candle has a small body and a long upper wick. What does that say about the session?
3. How do you calculate a candle's range and its body?
4. How does a daily candle differ from an hourly one?
5. Why is a single candle without context often just noise?

Next lesson

Lesson 4. Volume: the strength of a move, not its direction: the same 10% price rise can be made by a handful of trades or by a crowd. The first is chance, the second may be the beginning of something big. I will show you how to tell them apart, on a stock the whole world was talking about in 2021.

Educational material, not investment advice.