Reading candlesticks

What a candle is

Price charts are usually drawn with candlesticks. Each candle covers one period — 5 minutes, an hour, a day, a week. That period is the timeframe. Whatever the timeframe, a candle is built from the same four prices — OHLC:

• Open — the first trade of the period;
• High — the highest price reached;
• Low — the lowest price reached;
• Close — the last trade of the period.

The body spans open to close. If the close is above the open, the candle is green (bullish): buyers ended the period ahead. If it is below, the candle is red (bearish). The thin lines above and below the body are the wicks (shadows): prices reached during the period but not held by its end.

What each part tells you

Think of every candle as the scoreboard of a short battle between buyers and sellers.

• The body shows who won and by how much. A long body means one side dominated from start to finish.
• The upper wick shows where sellers pushed back. Price went up there but could not stay.
• The lower wick shows where buyers pushed back. Price was pushed down there, but buyers absorbed the selling.
• The close is the most important of the four. It is the price everyone agrees on when the period ends, and on the daily chart it is the number most funds, institutions and indicators use.

Measuring a candle with numbers

"Long wick" and "small body" become precise once you measure them. Take a daily candle: open $50.00, high $51.20, low $47.80, close $50.60.

• Range (high − low): $51.20 − $47.80 = $3.40.
• Body (close − open): $50.60 − $50.00 = $0.60 — about 18% of the range.
• Lower wick (open − low, since the candle is green): $50.00 − $47.80 = $2.20 — about 65% of the range.
• Upper wick (high − close): $51.20 − $50.60 = $0.60.

So during the day sellers pushed price $2.20 below the open, and buyers not only took it all back but closed 60 cents higher. That is the profile of a hammer. A useful rule of thumb: a "long" wick is at least twice the body, and a "small" body is less than about a third of the range.

Always compare a candle with its neighbours. A $3.40 range is huge for a stock that usually moves $1 a day and ordinary for one that moves $5.

Timeframes: one candle hides many

A daily candle is just a summary of all the smaller candles inside it. Below, the seven hourly candles of one session (09:30–16:00 ET) are drawn next to the daily candle they make up.

On the hourly chart you see a two-hour sell-off from $100 to $97, then a steady five-hour recovery to $101. On the daily chart all of that becomes one candle: open $100, high $101.30, low $97, close $101 — a $1 body with a $3 lower wick. The same events, two very different pictures.

Practical consequences:

1. Higher timeframes carry more weight. A hammer on the daily chart reflects a full day of trading by millions of participants; a hammer on a 5-minute chart can be the work of a handful of orders.
2. Wait for the close. Until the period ends, the candle is unfinished. A "hammer" at 14:00 can become a plain red candle by 16:00. Judge daily candles after the regular session closes.
3. Pick a main timeframe and stick to it. For investors and swing traders in this course that is usually the daily chart. Lower timeframes are only for fine-tuning entries — more in multi-timeframe analysis.