How to read a candlestick chart: candles, wicks and patterns

A candlestick packs four prices for one period — open, high, low and close (OHLC) — into a single shape. The thick part, the body, runs from the open to the close. The thin lines above and below, called wicks or shadows, stretch to the highest and lowest prices traded. Depending on the chart setting, each candle can represent anything from one minute to one week.

Candlestick charts were developed by Japanese rice traders centuries ago and popularised among Western traders in the early 1990s by Steve Nison. They show the same data as a bar chart, but the coloured body makes the tug of war between buyers and sellers visible at a glance.

Take a daily candle with an open of 100, a high of 108, a low of 97 and a close of 105. Because the close is above the open, it is a green (bullish) candle with a body from 100 to 105. The upper wick runs from 105 to 108: buyers pushed the price to 108 but couldn't hold it. The lower wick runs from 97 to 100: sellers drove it down to 97 before buyers took over. The day's full range is 108 − 97 = 11.

The proportions tell the story. A long body with short wicks means one side was in control all period. A long lower wick after a decline means sellers were rejected — the basis of the 'hammer' pattern. A tiny body with wicks on both sides (a doji) means the open and close were nearly equal: indecision.

A handful of patterns are widely watched: the hammer and its mirror image, the shooting star; the doji; and two-candle engulfing patterns, where the second body completely covers the first and suggests a shift in control. Three-candle formations such as the morning star and evening star tell the same story over three periods.

Patterns carry more weight depending on where they form — at a known support or resistance level, after an extended move — and when the next candle confirms them, ideally on higher volume.

Research on candlestick patterns gives mixed results, and many patterns that look convincing in a textbook fail in live markets. Read them as clues about short-term sentiment, not as forecasts.

Two technical details also trip people up. The colour compares the close with the open, not with the previous close: after a gap down, a stock can print a green candle and still finish the day lower. And in 24/7 crypto markets there is no natural session, so daily candles depend on a chosen cut-off time — usually midnight UTC — and can differ between data sources.