Article 7: How to Read Price Charts - Candlesticks Explained
Article 7
8 min read
Technical Analysis
Monday

How to Read Price Charts: Candlesticks Explained

Master the art of reading candlestick charts and decode the stories they tell about market battles between buyers and sellers.

Staring at your first trading chart can feel like trying to read hieroglyphics. Those colorful bars going up and down might look like abstract art, but they're actually telling you a detailed story about what happened between buyers and sellers during each time period.

Today we're going to decode the most common type of price chart which is candlestick charts. Hopefully by the end of this article, you'll be reading them like a trader who's been doing this for years.

The Market's Diary

Think of candlesticks as the market's diary. Each one captures a complete story of battle between bulls (buyers) and bears (sellers) during a specific time period, whether that's one minute, one hour, or one day.

Anatomy of a Candlestick

Before we get into patterns and strategies, let's understand what each candlestick is actually showing you. Every single candlestick contains four crucial pieces of information and has specific visual components that tell the complete story.

Visual Components of a Candlestick
↑
Bullish Candle
Close higher than open (Green/White)
↓
Bearish Candle
Close lower than open (Red/Black)
Color Coding Note

Green (or white) candles: Close price is higher than open price (bullish)
Red (or black) candles: Close price is lower than open price (bearish)
Some platforms let you customize colors, but green/red or white/black are the most common conventions.

The Four Key Prices

Every candlestick contains exactly four pieces of price information that together tell the complete story of that time period:

Open
The first price traded during that time period. Where the battle begins.
High
The highest price reached during that time period. Bulls' maximum advance.
Low
The lowest price reached during that time period. Bears' maximum advance.
Close
The last price traded during that time period. Who won the battle.
Real Example Story

Let's say you're looking at a daily chart of Apple stock, and you see a green candlestick:

The Setup: Apple opened the day at $150.

The Battle: During the day, bears pushed it down as low as $148 (the low), but bulls fought back and even pushed it as high as $155 (the high).

The Resolution: By market close, bulls had won the day, closing at $153 (higher than the $150 open), creating a green candle.

Types of Candlestick Bodies

The size and color of the candlestick body tells you how intense the battle was and who had more control:

Large Bodies
Strong Conviction
Green large body: Strong buying pressure. Bulls dominated convincingly.
Red large body: Strong selling pressure. Bears were in complete control.
Large bodies suggest strong conviction in the direction of the move. The bigger the body, the more decisive the victory.
Small Bodies
Indecision
When the open and close are very close to each other, you get a small body or even just a line.
Indecision. Neither buyers nor sellers could gain meaningful control. Often signals potential direction changes.
Perfect Doji
Perfect Balance
When open and close prices are exactly the same, you get a cross-like formation with just wicks.
Perfect balance between buyers and sellers. Strong indecision that often precedes significant moves.

Understanding the Wicks

The wicks (also called shadows) are just as important as the bodies – they show you what happened during the battle, not just who won. The thin lines extending above and below the body reveal the highest and lowest prices reached.

Long Upper Wicks
Rejection at Highs
Green candle: Bulls pushed higher but couldn't hold those levels. Some selling pressure at higher prices.
Red candle: Bears tried to rally but got overwhelmed.
Shows selling pressure or profit-taking at higher price levels. Often indicates resistance.
Long Lower Wicks
Support at Lows
Green candle: Bears pushed lower but bulls fought back strongly. Strong buying interest at lower prices.
Red candle: Bears pushed down but couldn't sustain the move.
Shows buying support or value hunting at lower price levels. Often indicates support.
No Wicks
Complete Dominance
Market opened near the low and closed near the high (green) or opened near the high and closed near the low (red).
Very strong directional pressure with no significant counter-moves. Shows complete dominance by one side.

Common Single Candlestick Patterns

Now that you understand the basics, let's look at some significant single-candle formations that traders pay attention to:

Hammer
Bullish Reversal
Small body at the top, long lower wick (at least twice the body size), little to no upper wick.
Story: Bears pushed price much lower, but bulls fought back strongly to close near the session high. Potential reversal signal, especially after a downtrend.
Shooting Star
Bearish Reversal
Small body at the bottom, long upper wick, little to no lower wick.
Story: Bulls pushed much higher, but bears fought back to close near the session low. Potential reversal signal, especially after an uptrend.
Spinning Top
Indecision
Very small body with upper and lower wicks of similar length.
Story: Both sides fought hard, but neither could gain meaningful control. Indecision that often appears before significant directional moves.
Marubozu
Strong Direction
Large body with no wicks (or very tiny ones).
Story: One side dominated completely from open to close with no meaningful counter-attack. Very strong directional conviction. Green = bullish, Red = bearish.

Timeframes: The Same Story, Different Scales

Here's something that confused me early on: the same stock can look completely different depending on which timeframe you're viewing. The timeframe you choose depends on your trading style and how long you plan to hold positions.

1-Minute Charts
Each candlestick represents one minute of trading. Great for day traders who want to see every little move, but can be noisy and hard to interpret for beginners.
5-Minute Charts
Each candlestick represents five minutes. Still detailed but slightly smoother than 1-minute charts.
1-Hour Charts
Each candlestick represents one hour. Good middle ground for day traders and swing traders.
Daily Charts
Each candlestick represents one full trading day. Most popular for swing traders and position traders. Less noise, clearer trends.
Weekly Charts
Each candlestick represents one week. Used for long-term analysis and identifying major trends.
Key Insight

A stock might show a strong green daily candle (bullish) while simultaneously showing red hourly candles (bearish intraday moves). This is completely normal and shows different battles happening at different time scales.

Context is Everything

Individual candlesticks are interesting, but they become powerful when you consider them in context. The same hammer pattern means different things in different situations:

After Strong Downtrend
Potential Reversal
A hammer after several red candles suggests potential buying interest and possible reversal.
High Significance: Shows buyers stepping in at lower levels after sustained selling pressure.
After Strong Uptrend
Normal Pullback
A hammer during an uptrend might just be a normal pullback before continuation higher.
Lower Significance: May just represent normal profit-taking in a healthy uptrend.
In Sideways Market
Minimal Significance
A hammer in a ranging market might not have much significance at all.
Minimal Significance: Just normal price action within the established range.
Trading Wisdom

This is why successful traders don't just look at individual candles – they consider the overall trend, recent price action, and market context. A pattern is only as strong as the story it tells within the bigger picture.

Practical Tips & Common Mistakes

Here are practical tips for improving your chart reading skills, plus common mistakes to avoid:

Start with Daily Charts
As a beginner, daily charts are your friend. They're less noisy than shorter timeframes and easier to interpret. Master daily charts before exploring shorter timeframes.
Look for Obvious Patterns First
Don't try to find patterns in every candle. Focus on the really obvious ones – clear hammers, shooting stars, large marubozu candles. Quality over quantity.
Consider Volume
A hammer with high volume is more significant than one with low volume. Volume confirms the story the candlestick is telling. Always check volume alongside price patterns.
Practice with Historical Charts
Go back in time on charts and practice identifying patterns. See what happened after various candlestick formations. This builds pattern recognition skills.
Don't See Patterns Everywhere
Not every candlestick is significant. Sometimes a hammer is just a random candle, not a reversal signal. Avoid forcing patterns where none exist.
Don't Ignore the Trend
A bearish pattern in a strong uptrend is less significant than the same pattern after a major decline. Always consider the bigger picture trend.
Wrong Timeframe Usage
Day trading based on daily candle patterns or swing trading based on 1-minute patterns usually doesn't work well. Match your timeframe to your trading style.
Trading Single Candles Alone
Candlesticks are just one piece of the puzzle. They work best when combined with support/resistance levels, trends, and other technical factors.

The Psychology Behind the Patterns

Understanding what candlesticks represent psychologically makes them more powerful. When you start thinking of candlesticks as representations of market psychology rather than just price movements, you'll begin to anticipate what might happen next.

Large Green Candles
Greed and FOMO driving buying. Fear of missing out on gains.
Large Red Candles
Fear and panic driving selling. Desperation to exit positions.
Doji Patterns
Uncertainty and indecision. Market participants unsure of direction.
Long Wicks
Rejection of certain price levels. Strong opposition to those prices.
Building Your Skills

Daily Practice: Spend 10-15 minutes each day looking at charts. Start with major stocks or indices you're familiar with.

Pattern Recognition: Keep a trading journal with screenshots of patterns you identify and what happened afterward.

Multiple Timeframes: Once comfortable with daily charts, practice looking at the same stock on different timeframes to see how the story changes.

Key Takeaways

  • Every candlestick contains four key prices: open, high, low, and close
  • Large bodies indicate strong conviction, small bodies suggest indecision
  • Long wicks show rejection at certain price levels and potential support/resistance
  • Context matters more than individual patterns - consider the overall trend
  • Different timeframes tell different stories about the same asset
  • Start with daily charts and obvious patterns before exploring complex formations
  • Practice with historical data to build pattern recognition skills
  • Don't trade on candlestick patterns alone - use them as part of a complete analysis