How Candlesticks Work

"Tags: candlesticks, candle chart, technical chart, OHLC Prerequisites: understanding-ohlc A candlestick is a compact drawing of four prices. Its value comes from structure, not superstition. Questions this article answers How is a candlestick built? What do the body and wicks represent? Why are candles coloured differently? Why should a candle be read in context? 1. From four numbers to one visual object A candlestick converts open, high, low and close values into a visual shape. The candle body represents the distance between open and close. The thin lines above and below the body represent price movement beyond the body toward the high and low. 2. The real body The real body spans from the opening price to the closing price. A large body means the open and close were far apart. A small body means they were close together. Body size must be compared with the stock's normal behaviour and the surrounding candles. 3. Upper wick The upper wick extends from the top of the body to the high of the period. It shows that price traded above the body at some point. A long upper wick can indicate that higher prices were not maintained, but it does not prove that price must fall next. 4. Lower wick The lower wick extends from the bottom of the body to the low of the period. It shows that price traded below the body at some point. A long lower wick can indicate that lower prices were not maintained, but the next move still depends on context. 5. Up candles and down candles Most platforms use one colour when the close is above the open and another when the close is below the open. Green and red are common, but colours can be changed by the user. The meaning comes from the open-close relationship, not from the colour itself. 6. Four example candles 7. The candle's location matters The same candle shape can mean different things in different locations. A long lower wick after a severe decline is different from the same wick in the middle of a random range. A large up candle breaking a long resistance zone is different from a large up candle after an already extended vertical move. 8. One candle is not a complete setup Candlestick names are often presented as automatic signals. This is dangerous. A candle should be interpreted with trend, nearby structure, volume, volatility, market context and risk. The candle is evidence from one period, not a complete decision. 9. Candle sequence Several candles together show how price is progressing. A sequence of higher closes, tight pullbacks and expanding range may describe strengthening demand. A sequence of failed advances and repeated heavy declines may describe weakening structure. The sequence is usually more useful than memorising one isolated shape. 10. Candle size depends on timeframe A large candle on a 5-minute chart may be invisible on a weekly chart. The candle must be judged relative to its timeframe and the stock's normal movement. 11. Candles and volume Volume can add context by showing how much trading activity accompanied the candle. A large price candle on unusually high volume may reflect broad participation, while the same candle on thin volume may be less reliable. Volume is studied fully in the next module. 12. Common beginner mistakes Memorising candle names without context Shape alone is not enough. Assuming a long wick guarantees reversal It records rejection during one period, not the future. Ignoring prior trend A candle's meaning depends partly on what came before it. Comparing candle size across unrelated stocks Different prices and volatility require relative comparison. Believing colour is the signal The open-close relationship is the actual information. 13. DStreet principle Candles are letters. Structure is the sentence. Never make a major decision from one letter. 14. Beginner checklist The body spans open to close. The upper wick reaches the high. The lower wick reaches the low. Colour shows whether close finished above or below open. Candle size should be compared with surrounding behaviour. Location and sequence matter more than a candle name. 15. Quick knowledge check Question: What does the candle body represent? Answer: The distance between open and close. Question: What does the upper wick reach? Answer: The period high. Question: Does a long lower wick guarantee a rise? Answer: No. Question: Why can candle colour vary between platforms? Answer: Users can change display settings. Question: What is usually more useful than one candle? Answer: The surrounding structure and candle sequence. 16. Next lesson Green and Red Candles. The next article examines what up and down candles do and do not tell a beginner."