Candlesticks Explained

A weather app can sum up a whole day in one small icon: a sun, a cloud, a lightning bolt. You glance at it and instantly know what the day was like. A candlestick does the same for price. One small shape tells you where price started, where it finished, and how far it wandered in between.

The four prices: OHLC

Every candlestick is built from four numbers for a chosen period of time:

• Open: the price at the start of the period.
• High: the highest price reached during the period.
• Low: the lowest price reached during the period.
• Close: the price at the end of the period.

Together these are called OHLC. The period is your timeframe. On a daily chart, each candle is one day; on a 1-hour chart, each candle is one hour. The candle shapes work the same on every timeframe.

Anatomy of a candle

A candle has two parts:

• The body, the thick part, shows the range between the open and the close.
• The wicks (also called shadows), the thin lines above and below, show the high and the low.

The colour tells you the direction:

• A green (bullish) candle closed higher than it opened.
• A red (bearish) candle closed lower than it opened.

   GREEN (bullish)          RED (bearish)

        |  High                  |  High
      +---+  Close             +---+  Open
      |   |                    |###|
      |   |                    |###|
      +---+  Open              +---+  Close
        |                        |
        |  Low                   |  Low

Notice that the open is at the bottom of a green body and at the top of a red body. That trips up many beginners.

Worked example: reading one candle

A stock's daily candle shows:

• Open: $100
• High: $108
• Low: $97
• Close: $106

Break it down:

• Close ($106) is above open ($100), so it is a green candle.
• Body: $106 − $100 = $6
• Upper wick: $108 − $106 = $2
• Lower wick: $100 − $97 = $3

The story: sellers pushed the price down to $97 early in the day, then buyers took over, drove it up to $108, and it closed near the top at $106. Buyers were in control by the end of the day.

What the shapes tell you

You can read a lot from the proportions alone:

• Long body: one side was firmly in control.
• Small body: buyers and sellers were roughly balanced. Indecision.
• Long upper wick: price tried to go higher but got pushed back down. Sellers rejected those prices.
• Long lower wick: price tried to go lower but got pushed back up. Buyers rejected those prices.

Three common patterns

Doji

A doji forms when the open and close are almost the same, so the body is a thin line. It looks like a cross or plus sign.

      |
      |
    --+--   open and close almost equal
      |
      |

What it suggests: indecision. Neither buyers nor sellers won. After a strong move, a doji can be an early hint that the move is running out of energy, but on its own it is just a pause.

Hammer

A hammer has a small body near the top and a long lower wick, at least twice the size of the body, with little or no upper wick. It matters most after a fall in price.

     +-+    small body near the top
     +-+
      |
      |     long lower wick
      |
      |

What it suggests: sellers pushed price well down during the period, but buyers fought back and closed it near the high. After a downtrend, that can signal that selling pressure is fading.

Engulfing

An engulfing pattern uses two candles. In a bullish engulfing, a red candle is followed by a bigger green candle whose body completely covers the red body. A bearish engulfing is the mirror image: a green candle swallowed by a bigger red one.

            +---+
     +---+  |   |
     |###|  |   |   green body covers
     |###|  |   |   the whole red body
     +---+  |   |
            +---+
     day 1  day 2

Worked example: Day 1 opens at $52 and closes at $50 (red). Day 2 opens at $49.80 and closes at $52.60 (green). Day 2's body, from $49.80 to $52.60, completely covers Day 1's body from $50 to $52. After a downtrend, that is a bullish engulfing: buyers overpowered the previous day's sellers.

Patterns are clues, not promises

No candlestick pattern wins every time. Plenty of hammers are followed by more selling. To make patterns more useful:

• Check the location. A hammer at a well-known support level means more than one in the middle of nowhere.
• Check the trend. Reversal patterns only make sense after there is something to reverse.
• Wait for confirmation. Many traders want the next candle to move in the expected direction before acting.
• Prefer higher timeframes. A pattern on a daily chart carries more weight than the same shape on a 1-minute chart.

Risk note: Treat every pattern as a reason to pay attention, not a reason to trade. Always decide where your stop loss goes before you act on any signal.

Key takeaways

• Each candle shows four prices for its period: open, high, low and close.
• The body shows open to close; the wicks show the high and low.
• Green means it closed higher than it opened; red means it closed lower.
• A doji signals indecision, a hammer can signal fading selling, and an engulfing shows one side overpowering the other.
• Patterns work best at key levels, in context, and with confirmation.

Up next: Support and Resistance, the price floors and ceilings that give candlestick patterns their meaning.