What it means
Each candlestick covers one time period, which might be a minute, a day, a week or a month depending on the chart. If the close is above the open the body is usually drawn light or green, and if the close is below the open it is drawn dark or red.
That single convention lets a reader scan months of trading and see direction without reading any numbers. The shape carries information that a simple line chart hides.
A long body means the price moved decisively in one direction and held, while a short body with long shadows on both sides means the price travelled a long way and ended up roughly where it began, which usually signals indecision. Traders therefore read candlesticks as a record of pressure between buyers and sellers rather than just a price level.
Named patterns are built from one, two or three candlesticks. A doji has almost no body because the open and close are nearly equal, a hammer has a small body with a long lower shadow, and an engulfing pattern is a large body that covers the previous period's body completely.
These are descriptive labels, not predictions, and their usefulness depends heavily on where they appear and on confirmation from volume or trend. Candlesticks appear well outside trading screens.
Commodity buyers use them to see how volatile an input price has been, treasury teams use them when reviewing exchange rate movements, and finance teams presenting market data use them because they show range as well as direction. Anyone reading a market update is likely to encounter one.
Two cautions matter for a general business reader. A candlestick describes what already happened, so reading a pattern as a forecast is a misuse of the tool, and the appearance of the same data changes with the period chosen, so a daily chart and a weekly chart of the same market can look like different stories.
Checking the period and the price scale before interpreting anything prevents most errors.
In practice
Real-world examples.
Example
A treasury analyst reviewing a currency pair sees three consecutive days with small bodies and long shadows in both directions. She reports that the market is unsettled rather than trending. The company delays a large conversion by a week rather than acting on a single day's closing rate.
Example
A commodity buyer at a food manufacturer charts weekly wheat prices as candlesticks and notices that weekly ranges have roughly doubled. He uses that observation to argue for wider price tolerance in the budget. The procurement committee approves a larger hedging allocation.
Example
An investor relations manager preparing a board pack replaces a line chart of the share price with candlesticks for the last six months. Directors can now see that two apparently similar monthly moves had very different intraday ranges. The discussion shifts from the closing price to volatility.
Formula
Calculation
Body = Close - Open. Upper shadow = High - the greater of open and close. Lower shadow = the lesser of open and close - Low. Total range = High - Low.
Take one trading day for a share: open $48.00, high $52.50, low $47.20, close $51.80.
Body = $51.80 - $48.00 = $3.80, and because the close is above the open the candlestick is drawn as a rising period.
Upper shadow = $52.50 - $51.80 = $0.70. Lower shadow = $48.00 - $47.20 = $0.80.
Total range = $52.50 - $47.20 = $5.30, so the body is $3.80 / $5.30 = 0.717, or about 72% of the range, a decisive day rather than an indecisive one. For comparison, a day with open $50.00, high $52.00, low $48.00 and close $50.10 has a body of just $0.10 against a range of $4.00, only 2.5% of the range, which is the classic indecisive shape.Case study
Seen in the real world.
Vantage Orchard Foods is an illustrative juice producer invented for this example and is not a real business. Its procurement team bought concentrate on a spot market and reported progress to the board using a simple line of month-end prices, which suggested a calm market moving gently upwards.
In this fictional scenario the finance director rebuilt the same data as weekly candlesticks. The chart showed something the line had hidden: several weeks had ranges of more than 15% between high and low, with small bodies, meaning the month-end price was close to luck rather than a settled market level. Buying on a single day each month was exposing the company to whichever point in a wide range it happened to hit.
Vantage changed its approach to buying in four weekly tranches instead of one monthly purchase, which averaged its price across the range. Over the following two quarters its average cost came in slightly below the month-end series it had previously reported. The illustrative point is that how price data is drawn can change the decision, not just the picture.
Watch out
Common mistakes.
- Reading a candlestick pattern as a forecast, when the chart only records price movement that has already happened.
- Comparing charts without checking the time period, because the same data drawn daily, weekly and monthly produces very different shapes.
- Ignoring the shadows and reading only the body, which hides how far the price travelled during the period.
Questions
People also ask.
What do the four prices on a candlestick mean?
They are the open, the high, the low and the close for that single period, with the body spanning open to close.
What does the colour tell you?
A light or green body means the close was above the open, and a dark or red body means the close was below the open.
Are candlesticks only for shares?
No, they are used for currencies, commodities, bonds, indices and any other market where open, high, low and close prices are recorded.
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