Candlesticks
What is a Candle?
A candle is a summary of everything that happened in a time window. It records where buyers and sellers were willing to agree, where they refused, and who still had control when time ended.
Anatomy of a Candle
Every candlestick has four key parts:
Open - Where the price started for that time period
Close - Where the price ended for that time period
High - The highest price reached during that time period
Low - The lowest price reached during that time period
The Open - "Where agreement began"
The open is the price where the first trade of that time window happened. It has no special power - it's just the starting point.
The Close - "Where agreement ended"
The close is the last price where buyers and sellers agreed when time ran out.
This matters because:
- It shows who had control at the end
- It reflects who was still willing to trade
That's why closes matter more than highs and lows.
The Body - The Most Important Part
The body is the thick part of the candle between the open and close. It shows you who won that battle:
- Green/White body = Buyers won (price closed higher than it opened)
- Red/Black body = Sellers won (price closed lower than it opened)
The size of the body tells you how decisive the victory was.
What the body really means:
The body shows where agreement was sustained.
Large bullish body (close much higher than open):
- Buyers were willing to pay higher prices
- Sellers who wanted cheaper prices disappeared
- Trades kept happening at progressively higher prices
- Buyers accepted those prices anyway
- Agreement kept moving upward until time ran out
Large bearish body (close much lower than open): The exact mirror - sellers controlled the terms, buyers stepped back, agreement kept moving downward.
Small body (doji-like):
- Buyers tried
- Sellers tried
- Neither side could sustain progress
- Agreement oscillated
- Ended near where it started
Lots of activity. Little resolution.
Wicks (Shadows)
The thin lines above and below the body. These are important because they show rejected price action - prices that were tested but couldn't hold.
- Upper wick = Buyers pushed price up, but sellers rejected it and pushed it back down
- Lower wick = Sellers pushed price down, but buyers rejected it and pushed it back up
The longer the wick, the stronger the rejection.
What the wick really means:
The wick shows where agreement failed.
Price went there. Trades happened. But agreement collapsed and price couldn't stay.
Body vs Wick - The Clean Distinction
This is crucial to understand:
The body shows where agreement was sustained. The wick shows where agreement failed.
- Body = accepted prices
- Wick = rejected prices
The Body-Wick Ratio
To understand the market, look at the ratio between body and wick:
Long body / Short wick = One-sided control One side dominated. The engine moved price in one direction with almost no resistance.
Short body / Long wick = Rejection One side tried to move price but hit a wall of orders so large they were pushed all the way back.
Build a candle yourself. Drag the open, high, low and close, or pick a shape, and watch what the candle says:
Try it · Candlestick Builder
Closed above the open. Buyers won the period.
What this candle is
Bullish
A candle is four prices drawn as a shape: the open, the high, the low and the close. Drag a handle on the chart and watch it change.
What the candle says
- Bullish candle: it closed above where it opened, so buyers won the period.
- Both wicks are modest, so price stayed fairly close to the body throughout.
A single candle is a clue, not a signal. Patterns mean more when they appear at a meaningful level and in the right context, and none of them guarantees what price will do next.
How was this calculated?
- Body = |Close − Open| = |1.1070 − 1.1000| = 70 pips
- Upper wick = High − the higher of open and close = 1.1100 − 1.1070 = 30 pips
- Lower wick = the lower of open and close − Low = 1.1000 − 1.0950 = 50 pips
- Direction: close above open, so the candle is bullish
Types of Candles
There are three main candle types to understand. Each one tells you something different about who's in control.
Pinbar / Hammer
What it looks like: Small body with a long wick on one side
What it means: Control shift - someone tried to push price in one direction but got rejected hard. This signals a potential change in control.
- Long lower wick (hammer) = Sellers pushed down but buyers said "no" and pushed it back up
- Long upper wick (shooting star) = Buyers pushed up but sellers said "no" and pushed it back down
Why reversal candles have long wicks + small bodies:
- One side tried hard
- The other side absorbed it
- Agreement snapped back
- Control changed hands
That's a fight - not a trend.
Key point: The rejection wick should be at least 2x the size of the body to be meaningful.
Doji
What it looks like: Very small or no body, with wicks on both sides
What it means: Indecision - no one is in clear control. Buyers and sellers are fighting and neither side can win.
Key point: A doji after a strong move can signal that the move is running out of steam. It's not a reversal signal on its own, but a warning sign.
Momentum Candle
What it looks like: Large body with small or no wicks
What it means: Strength - there is clear control. One side dominated the entire candle from open to close.
- Big green candle with tiny wicks = Buyers in full control
- Big red candle with tiny wicks = Sellers in full control
Why momentum candles look "strong":
- One side pushed
- The other side did not meaningfully resist
- Agreement shifted smoothly
Nothing mystical. Just low opposition.
Key point: The lack of wicks is what makes it powerful. No rejection means no resistance to that move.
Candlestick Patterns
Candlesticks and their patterns tell a story. A single candle gives you information, but multiple candles together can show you shifts in control and potential reversals.
Engulfing Candle
What it looks like: A candle that completely covers (engulfs) the previous candle's body.
- Bullish engulfing: A green candle that engulfs the previous red candle. Shows buyers took over from sellers.
- Bearish engulfing: A red candle that engulfs the previous green candle. Shows sellers took over from buyers.
What it means: A shift in control. The second candle completely overpowered the first, suggesting the new direction may continue.
Where to look for it: Most meaningful at support (bullish engulfing) or resistance (bearish engulfing) levels.
3 Bar Reversal Pattern
What it looks like: Three candles where:
- First candle moves in the original direction
- Second candle is small (indecision or pause)
- Third candle moves strongly in the opposite direction
What it means: The trend tried to continue, stalled, then reversed. The third candle confirms the reversal.
Key point: The third candle should be a strong momentum candle in the new direction. If it's weak, the pattern is less reliable.
Head and Shoulders
What it looks like: Three peaks where the middle peak (head) is higher than the two side peaks (shoulders).
- Head and Shoulders (top): Forms at the top of an uptrend. Signals potential reversal down.
- Inverse Head and Shoulders (bottom): Forms at the bottom of a downtrend. Signals potential reversal up.
How to trade it: The pattern completes when price breaks the neckline (the line connecting the lows between the peaks). Enter on the break or wait for a retest of the neckline.
Key point: The pattern takes time to form. Don't jump in early - wait for the neckline break.
Double (or Triple) Top/Bottom
What it looks like: Price reaches the same level two (or three) times and gets rejected each time.
Double Top:
Price hits resistance twice, fails to break through both times, then drops.
Double Bottom:
Price hits support twice, fails to break through both times, then rises.
What it means: The level is holding strong. After two (or three) failed attempts to break through, the market often reverses.
How to trade it: Wait for the "neckline" to break (the swing between the two tops/bottoms). That confirms the reversal.
Key point: Triple tops/bottoms are stronger signals than double - three failed attempts shows even more conviction that the level will hold.
Next: Risk Management
You can read the story, but reading isn't enough - you need a math-based plan to ensure you don't go bust while learning.