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
The sample candlestick chart at right is a daily
chart of the XAO
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.
candles show that sellers dominated the market in an almost
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
Knowing how to read these simple candles can be so very useful in
gauging the mood and sentiment of the market.
Sample candlestick chart
in late October 1997,
a market correction.
(see explanatory text at left)
What is this example chart telling us?
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.
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).
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
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
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.
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
to the low for each day, when compared to the other days.
- 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.
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)
On share price charts a
just simply a candle) can comprise the following
It is possible to have only one tail on a candle, or even no tails at
- A Body:
- Which can be black or white
(or red or green).
- It can be very tall in size, or
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
- A lower wick
- also called a tail
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:
- The body of the candle is white (or
- 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".
- 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 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?
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.
candle (or red)
- The body of the candle is black (or
- It is very similar to the white
- The top of the body is the Open
- The bottom of the body is the
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
Note the three samples at right:
- 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?
long lower tail, suggests a rejection of lower prices.
fairly normal candle (to see in a healthy rising trend) with an average
size body, and reasonably sized wicks.
very tall bullish candle with no tails at all (this specific candle
shape is called a Marubozu).
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.
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.
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
- 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 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.
Also look for more details in Toolbox
Toolbox Members can see more details about candlesticks...
There are some free eBook (PDF) Articles on candles listed here.
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
Investing - Ask yourself if the advice you receive
Analysis - A clever blend of Fundamental Analysis
to identify quality stocks for a watch list, and Technical Analysis to
time the purchase (and sale) of the stocks to minimise losses and
maximise profit and capital.
Contrarian Investing Redefined
- The old thinking about contrarian investing now ought to be
challenged, and somewhat clarified or redefined.
beware of the sharks
in the ocean!