Candlestick charts: how to read them
A candle sums up in one shape what the price did over a period: where it opened, where it closed and how far it went. It's the basic language of charts.
Technical analysis studies price and volume behavior to understand what the market is doing. Its basic tool is the Japanese candlestick chart, which comes from 18th-century Japanese rice traders and is used today on almost every platform.
The parts of a candle
Each candle represents a period (a day, an hour, five minutes) and shows four prices: open, high, low and close.
- Body: the rectangle between the open and the close.
- Wicks (shadows): the lines above and below, reaching the period's high and low.
- Color: green (or white) if it closed above where it opened; red (or black) if it closed below.
What the shape tells you
| Shape | What it shows | Common reading |
|---|---|---|
| Long green body | Buyers dominated the whole period | Buying strength |
| Long red body | Sellers dominated | Selling strength |
| Small body with long wicks | There was a fight and nobody won | Indecision |
| Long lower wick (hammer) | It fell a lot, but buyers pushed it back | Rejection of low prices |
| Long upper wick | It rose a lot, but sellers pushed it back | Rejection of high prices |
| Doji (open ≈ close) | A tie between buyers and sellers | Possible pause or turn |
Multi-candle patterns
- Bullish engulfing: a large green candle whose body fully covers the previous red one's.
- Bearish engulfing: the opposite, a large red one engulfing the previous green one.
- Morning / evening star: three candles suggesting a possible turn after a trend.
A pattern alone says little. It gains importance if it appears at a relevant place (a support or resistance, covered in the next lesson) and with high volume.
The time frame
The same stock can look like an uptrend on the weekly chart and a downtrend on the 15-minute one. Candles of long periods (daily, weekly) carry more weight than short ones, which have a lot of "noise". First define your horizon and use the matching chart.
Test what you learned
1. Which four prices does a candle show?
- Open, high, low and close
- Bid, ask, spread and volume
- Price, dividend, P/E and volume
Show the answer
Open, high, low and close. They sum up the period.
2. A candle has a very long lower wick and closes near its high. What does it suggest?
- That sellers dominated
- Rejection of low prices
- Nothing
Show the answer
Rejection of low prices. The price fell but buyers pushed it back.
3. Which chart carries more weight for a long-term trend?
- The 1-minute one
- The weekly one
- They weigh the same
Show the answer
The weekly one. Short periods have a lot of noise.
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Everything in this section is educational: it explains how investing works, it doesn't tell you what to buy.