Candlestick charts
Candle Basics

Candle-ology

Candlestick Basics - Getting started with interpreting candlesticks.

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What can the candles tell us? - Example

The candlestick chart can tell us a lot about the price action in a "period", as well as the health, mood and sentiment of the market.

The sample candlestick chart at right is a daily chart of the XAO index (All Ordinaries) in late October 1997 (a market correction). Each daily candle summarises the price action in each day. (On a weekly chart, each weekly candle summarises the price action in a whole week. Likewise for monthly, quarterly, yearly, etc.).

Notice the four long black candles on this sample chart indicating a savagely falling market index value, with a long lower tail on the last candle (indicating a rejection of lower prices). These four black candles represent a daily decrease in the index by about: 2%, 2%, 3% and 7% respectively - a total decline of about 14% in just four days. These candles show that sellers dominated the market in an almost panic-stricken manner.

This large fall is followed by a tall white candle (a rare increase of 6%), and mostly increasing index values in the following few days.
 
The sequence of long black candles, followed by a tall white candle is a candle bottom known as the Tower Bottom.

One key give-away for candle-watchers on this chart is the very long lower tail on the lowest black candle, which suggests a "rejection of lower prices", and shows that there were significant buyers in the market.

Knowing how to read these simple candles can be so very useful in gauging the mood and sentiment of the market.


Sample candlestick price chart

Sample candlestick chart
XAO index (All Ordinaries)
in late October 1997,
a market correction.
(see explanatory text at left)

What is this example chart telling us?

 
In the example above, the consecutive black candles, with the last one having a long lower tail, followed by a tall white candle, indicates what we call capitulation - a concerted effort by desperate investors to sell their stock at whatever price just to protect against further possible downside.
 
The long lower tail on the last black candle indicates that during the day, even though there was heavy selling (causing prices to fall further), enough buyers stepped in to bid prices higher so that the close for the day was well above the low for the day. (Remembering that this chart is the market index, which is an aggregation of 500 stocks, it does reflect that is happening in a number of the stocks within the index).
 
The first white candle on this chart has a very tiny lower tail, indicating that buyers were dominating for most of the session. The height of the candle also indicates the buyers dominating. The upper tail on this candle and the next candle (a Spinning Top) indicate a weight of sellers still present; but the next three white candles indicate the buyers dominating again.
 
The index then went on to rise a total of 25 percent from the close on 28 October over the next 6 months.

Why is this useful?

Knowing how to interpret basic candlestick features and patterns can be very useful in understanding the mood and sentiment of the market. Candles tell us a whole lot more about the market than the simple line chart can tell us.

They can help to identify likely turning points in a stock or in the market index.

Don't forget that the price charts summarise the opinions of market participants.

A quick sample

The humble candlestick chart (like the sample at right) shows us the range in price in each "period".
 
This sample chart is a daily chart of BHP showing the six candles for each of six trading days in August. Each candle shows us the range in price in each day. The white candle on 20 August has a short lower tail down to the Low price of the day, and a very tiny upper tail (or wick) reaching up to the High of the day.
  • On a daily price chart, the candle summarises the price action for the day.
  • In general terms, the candle summarises the price action in one "period".
  • The "period" could be a day on a daily chart, or a week on a weekly chart, or a month on a monthly chart, etc., etc.
In the sample chart at right, the two candles on 22nd and 25th are shorter relative to the other candles on the chart. This shows us a shorter range in prices from the high to the low for each day, when compared to the other days.

Sample candlestick price chart

Sample Daily chart of BHP
in October 2008

Click on the image for a
larger version in a new window.

(see explanatory text at left)

Candlestick basics

On share price charts a candlestick (or just simply a candle) can comprise the following elements:

  • Body:
    • Which can be black or white (or red or green).
    • It can be very tall in size, or it can be short.
    • In some cases, the candle body is so short it appears to have no body at all (eg. what we call a Doji pattern).
  • An upper wick - also called a tail or shadow.
  • A lower wick - also called a tail or shadow.
It is possible to have only one tail on a candle, or even no tails at all.

candle basics

White candle (or green)

  • The body of the candle is white (or green).
  • The bottom of the body indicates the Open price for the "period".
  • The top of the body indicates the Close price for the "period".
  • The top of the upper wick indicates the High price for the "period".
  • The bottom of the lower wick indicates the Low price for the "period".
Note: In case you didn't realise it, there are four key price values in every trading period which are captured and stored, and available to be viewed in price charts:
  • Open price for the period - the first traded price for the day.
  • High price for the period - the highest price paid during the period.
  • Low price for the period - the lowest price paid during the period.
  • Close price for the period - the last price paid at (or just before) the close of the period.
White candle

White and black - which is which?

We note the only difference between a white candle and a black candle is the position of the open price and close price.

So, when comparing the white candle (above) and the black candle (below), how can we easily remember which is which?

How to remember white versus black?

The colour black is often associated with doom and gloom, so a black candle indicates a period where the price fell during the period, so the close is lower than the open.

Black candle (or red)

  • The body of the candle is black (or red).
  • It is very similar to the white candle except:
    • The top of the body is the Open price.
    • The bottom of the body is the Close price.
Black candle

Candle bodies, wicks, tails

When observing individual candles, it is important to realise that the candle body, and the tails, are all optional. The key things to look for include:
  • Is there a body at all? If not, it will be a Doji.
  • Is there an upper wick?
  • Is there a lower wick?
  • If there is a wick, how long is it?
Note the three samples at right:
  1. A long lower tail, suggests a rejection of lower prices.
  2. A fairly normal candle (to see in a healthy rising trend) with an average size body, and reasonably sized wicks.
  3. A very tall bullish candle with no tails at all (this specific candle shape is called a Marubozu).

Basic candle shapes.

Doji candles

We mentioned Doji candles above. The diagram at right shows some variations in the basic Doji candle shape.

These variations are mostly long or short upper and/or lower tails.

Doji candles.

Multi-candle patterns

It is also very useful to observe 2 or 3 adjacent candles, as specific combinations can give us more good clues about the mood of the market, and the presence or absence of buyers and sellers.

Some candle patterns can also suggest a likely change in trend.

The two sample candle patterns at right are what we refer to as 2-candle patterns - there are also 3-candle and 4-candle patterns. These two patterns are very bearish, and if seen in a rising trend, suggest a possible abrupt change in trend to downward.

Sample bearish candle patterns.

One candle can summarise many

Note the following regarding the sample price chart of BHP at right:
  • This is actually a 1-minute line chart with a single candle superimposed. They apply to intraday charts also.
  • The 1-minute line chart shows the price action through the day. There were 9,958 trades during the day, so the squiggly line on the chart is joining up 9,958 points. The price Opened at $43.57 at 10am, then fell to a Low of $43.28 around the middle of the day, then rose to a High of $43.68 late in the day, then fell a little in the last few minutes to Close at $43.65.
  • A single blue coloured candle is superimposed on the chart, summarising the price action for the day - so it is a daily candle.

A chart showing a Line and Candle superimposed.

A 1-minute price chart of BHP for the 6-hour
period from 10am to 4pm on 15 January.
Click on the chart for a larger image
in a new window.

More information

Also look for more details in Toolbox Master Index.

Toolbox Members can see more details about candlesticks...
 

More information

There are some free eBook (PDF) Articles on candles listed here.


Useful Links

The following web sites have lots of free information about candlestick charts and patterns.

History and more at Wikipedia

Bulkowski's Candlestick Patterns 

My SMP (Stock Market Power)

Master the Markets - Japanese Candlesticks


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Last revised: 9 February,  2016.