Level 1 Reading charts · Part 2/7

Reading Candles: Body, Wick, Colour

The candle is the most common price rendering because it packs four numbers into a shape you can read in a fraction of a second. Its construction is quickly explained; the interesting part is what the proportions say.

Construction

A candle compresses four prices: (1) the upper wick reaches the day's high, (2) the body spans open to close, (3) the lower wick reaches the day's low. (4) On a down candle the open sits at the top and the close at the bottom — same parts, opposite direction.

The body spans open to close. If the close is higher, the candle counts as up and is drawn hollow or green; if lower, as down and drawn filled or red. The wicks – also called shadows – reach to the period’s high and low.

Colours are pure convention. Japanese candles were historically white and black, and in many professional applications they still are. Colour carries no information that is not already in the position of open and close.

The proportions carry the message

The real information in a candle is the ratio of body to total range:

Long body, short wicks: price moved one way and stayed there. The market largely agreed.
Short body, long wicks: plenty of movement, no result. Both sides pushed prices through, neither could hold them.
A long wick on one side: a price area was reached and rejected. That is where the information sits – not in the colour.

(1) A marubozu is a candle with almost no wicks: price opens at one end of the range and closes at the other — one direction, all day. (2) The same downward. (3) A spinning top is the opposite: small body, wicks on both sides, plenty of movement with no result. Body length relative to total range is the real information in any candle.

These three basic forms carry names from Japanese charting – marubozu, spinning top, doji – but the names are secondary. If you read the ratio, you do not need the vocabulary.

Size is relative

There is no absolute “large” candle. A two per cent range is an exceptional day for a quiet bond ETF and a Tuesday for a cryptocurrency. What is meaningful is the comparison with the last ten to twenty candles of the same instrument – exactly what average true range later turns into a number.

Gaps

Between one close and the next open there can be a gap: trading resumes at a different price from where it stopped. Gaps appear wherever trading is interrupted – overnight, over a weekend, around earnings.

Where trading is continuous, gaps are rare. Crypto trades around the clock, major currency pairs five days a week without a break. A pattern that requires a gap is structurally rare there – good evidence that candlestick patterns are not universal laws but depend on market mechanics.

What every candle destroys

A candle does not say in what order the prices occurred. A day that rises to its high and then collapses to its low can produce exactly the same candle as a day that breaks down first and then recovers. Economically those are two entirely different days.

That is why changing timeframe is not cosmetic but the only way to recover that information: a daily candle decomposes into 24 hourly candles that show the sequence. If you take a candlestick pattern seriously, you should at least know what happened one level down.

Multi-candle reversal and continuation patterns are covered in Level 2 . Before that, one piece of context is still missing – the one without which every reversal pattern is meaningless: the trend.