Free course · Module 7
How to read candlestick charts
Read the four prices in a candle, spot the difference between color and daily return, and keep pattern names in perspective.
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Idea 1 of 4
Four prices. One clear picture.
One candle summarizes one period. Open is the starting price, high and low mark the extremes, and close is the ending price. A daily candle summarizes a day; a weekly candle summarizes a week.
The body spans open to close. Wicks reach the high and low. On the simple color scheme used here, green means close above open and red means close below open. Chart settings can use other colors or hollow bodies, so check the legend. Source 1.
Calculate the body, range and both wicks
The body is not the whole range. Read the wicks too.
Idea 2 of 4
Color and daily return answer different questions.
A red candle can still be an up day. Color compares the close with that period’s own open. Daily return compares the close with the previous day’s close.
Suppose yesterday closed at $48. Today opens at $52 and closes at $51. The candle is red because $51 is below $52. The daily return is positive because $51 is above $48: $51 ÷ $48 − 1 = 6.25%.
What changes when you switch the timeframe?
Check the prior close before calling the day up or down.
Idea 3 of 4
A named pattern is not a promise.
Pattern names describe shapes. A doji has an open and close close together. A hammer-shaped candle has a small body near the top and a long lower wick; its interpretation also depends on the preceding trend.
An engulfing pattern compares two bodies: the second covers the first body. The wicks do not have to be engulfed. None of these names guarantees the next price move. Source 1.
Open and close sit close together.
A small body near the top of the range.
The second body covers the first.
What did the original research find?
Describe what happened before making a claim about what happens next.
Idea 4 of 4
Read three candles for yourself.
Practice reading before predicting. Open a chart, choose one instrument and a daily timeframe, then select three completed candles. Record the date, session setting and four prices for each.
Your three-candle check
Paper exercise- Calculate the body size, full range and both wicks. Check that body plus wicks equals the range.
- Compare each close with its own open, then separately with the prior close. Label these two comparisons.
- Switch to a weekly view. Find the first open, highest high, lowest low and final close for that week.
- Write one fact the candle cannot tell you, such as the order of intraday extremes or the next day’s return.
Use completed candles. The current candle can change while its period is still trading. This activity does not require a trade.
Check your arithmetic with one example
Read four prices, check the prior close, then state the limitation.
Quick check
Three quick checks. Feedback straight away.
A daily candle opens at $50, trades between $48 and $53, and closes at $49. How is it drawn?
Choose an answer to see the explanation.
In a fixed arithmetic exercise, the prior close is $754.05, the next open is $763.15 and the next close is $762.60. The candle is red. What is the close-to-close return?
Choose an answer to see the explanation.
What did Marshall, Young and Rose (2006) find for the candlestick strategies they tested on Dow Jones Industrial Average stocks?
Choose an answer to see the explanation.
Why can a red candle still be an up day?
Review your takeaway card and the learning path
- Four prices. Open, high, low and close summarize one period.
- Body and wicks. The body spans open to close; wicks reach the extremes.
- Two comparisons. Color uses the open; daily return uses the prior close.
- Descriptions have limits. Pattern names do not guarantee a profitable trade.
Reading markers and these practice checks stay on this device. They do not mark the LMS lesson complete.
Sources and assumptions
- StockCharts ChartSchool, Introduction to Candlesticks. Candle construction, bodies, shadows, doji and hammer context.
- Marshall, Young and Rose (2006), Candlestick technical trading strategies: Can they create value for investors?. Journal of Banking & Finance 30(8),2303–2323. Study result applies to the tested strategies and DJIA sample.
- Horton (2009), Stars, crows, and doji: The use of candlesticks in stock selection. The Quarterly Review of Economics and Finance 49(2),283–294. Abstract reports little value for methods tested on 349 stocks.
Diagrams use hypothetical prices. Quiz 2 uses fixed arithmetic inputs;it does not certify historical SPY quotes. Colors and session definitions vary by chart provider. Reading markers and practice checks do not record native LMS grades or completion.
StockEducation provides general education, not personal financial, tax or legal advice. Nothing here recommends a specific security. Investing involves risk, including loss of money you invest.
