A Beginner’s Guide to Candlesticks: Start Here

When analyzing the financial markets, traders rely on different types of charts to understand price movements and trends. Among these, candlestick charts are one of the most widely used and effective tools. But what are candlestick charts?

A candlestick chart is a type of chart used to represent price movements in a financial market. Each candlestick (or simply “candle”) represents a specific time period (e.g., one minute, one hour, or one day) and provides key information about price action.

The power in the candlestick chart lies in its visual representation of price changes, making it easier to spot patterns and trends when compared to traditional line or bar charts. But first, let’s look at a single candlestick, so you can understand what the candlestick charts are showing you.

Structure of a Candlestick

Each candle on a candlestick chart represents a snapshot of market sentiment. Depending on the time frame of the chart, each candle might contain anywhere from a few seconds to a few months of price action.

Candlestick Properties: OHLC, Body, and Wicks

To make a full candlestick, you need four key price points: the open, high, low, and close (often denoted by OHLC). These four prices tell a story of how a market moved within a given period:

📌 Open Price – The price at which the instrument started trading during the time period.
📌 High Price – The highest price reached during the time period.
📌 Low Price – The lowest price reached during the time period.
📌 Close Price – The price at which the instrument finished trading during the time period.

These four values form the body and wicks of a candlestick:

• The body of the candlestick represents the difference between the open and close prices.
• The wicks (or “shadows”) are thin lines extending above and below the body, showing the highest and lowest prices reached during the period.

🧠 Pop Quiz #1! Can you determine the price at the Open, High, Low, and Close of the selected candle on the following chart? You don’t have to be exact, but get as close as you can.

When you’re done, check your answers with the values along the top of the chart.

Candlestick Colors: Bullish vs. Bearish

Candlestick colors indicate whether the price moved up or down during the period. Colors can easily be adjusted in most trading software, and some trader will prefer other combinations based on ease or familiarity. Green and red are common because of their association with good (price increases) and bad (price decreases) in everyday life.

🟢 Bullish Candlestick (Green/White) – When the close price is higher than the open price, indicating that the stock’s price increased.
🔴 Bearish Candlestick (Red/Black) – When the close price is lower than the open price, indicating that the stock’s price decreased.

These basic elements form the foundation of candlestick chart reading, allowing traders to identify trends and potential market signals. In the next section, we’ll explore how to actually read a candlestick chart.

Candlestick Charts vs. Other Chart Types

📊 Line Charts: Simple but limited, showing only closing prices over time.
📊 Bar Charts: Similar to candlesticks but lack the same visual clarity, especially for spotting trends.
📊 Candlestick Charts: Preferred for their clear visual representation of market sentiment, making them ideal for technical analysis.

You can find an example of each of these charts below.

As you can see, line charts offer less information than the other two, by only showing closing prices. Bar charts show OHLC, but make it a bit difficult to determine these prices at a glance.

Candlestick charts make it easiest to find pertinent information about each candle’s open, close, and direction, and they are recommended for all levels of traders.

Candlestick charts are popular among traders for several reasons:
✅ They provide more information than simple line charts, which only show closing prices.
✅ The color and shape of candlesticks make it easy to see bullish (rising) and bearish (falling) trends.
✅ Candlestick patterns can signal potential reversals or continuations in price, helping traders make informed decisions.

Whether you’re a beginner or an experienced trader, learning to read candlestick charts is an important skill that can help you better understand price action and improve your decision-making in the financial markets.

Reading and Understanding a Candlestick Chart

Reading a candlestick chart involves understanding how price moves within a single candlestick and what different candle sizes, shapes, and volume levels reveal about market sentiment.

Understanding Price Movement Within a Single Candle

Each candlestick tells a story of how buyers and sellers interacted during a specific time period. Here’s how price moves within a candlestick:

1. The price opens at a certain level.
2. As trading progresses, the price fluctuates, forming the high and low points of the candle.
3. The candle closes at the final price of the period.
4. The color of the candle shows whether the price moved up (bullish) or down (bearish).

What Different Candlestick Sizes and Shapes Indicate

The size and shape of a candlestick provide key insights into market sentiment:

• Large Body Candles – Indicate strong buying or selling pressure.
  • 🟢 Large Bullish Candle: Strong bullish momentum (buyers in control).
  • 🔴 Large Bearish Candle: Strong bearish momentum (sellers in control).
• Small Body Candles – Suggest indecision or a weak price move.
  • A small body with long wicks can indicate a battle between buyers and sellers, with neither gaining full control.
• Long Upper Wick – Shows that buyers pushed the price up, but sellers forced it back down (potential bearish reversal).
• Long Lower Wick – Shows that sellers pushed the price down, but buyers brought it back up (potential bullish reversal).

🧠 Pop Quiz #2! Can you spot each in the chart of CMG below? Look for these in four separate candles: a large body, a small body, a long upper wick, and a long lower wick.

Wicks and bodies vary in size, so don’t worry about finding two that are equally sized – just look for the ones that are clearly larger relative to most of the other candles on the chart.

The Importance of Volume When Reading Candlestick Charts

Volume confirms the strength of price movements:

📈 High Volume + Large Candle – A strong, meaningful move (higher conviction).
📉 Low Volume + Large Candle – A weaker move that may not sustain.
🔄 High Volume + Small Candle – Indicates indecision despite heavy trading.

By combining candlestick analysis with volume data, traders gain deeper insights into market behavior and improve their ability to predict future price action.

See the chart below, where volume has been displayed along the bottom of the chart. Notice that certain moments show large fluctuations in volume, often coupled with dramatic price changes.

We will cover volume in depth in a future post, so don’t worry about it too much for now!

Candlestick Patterns and What They Mean

Candlestick patterns form when one or more candles create recognizable shapes.

While a single candlestick provides insight into price movement for a specific period, patterns emerge when multiple candles interact. These patterns can signal trends, reversals, or market indecision. When applied in the right context, they allow traders to position themselves to take profitable trades.

How Traders Use Candlestick Charts for Decision-Making

• Identifying Market Sentiment – Bullish patterns suggest buyers are in control, while bearish patterns indicate sellers dominate.
• Timing Entry & Exit Points – Patterns help traders decide when to buy, sell, or hold a position.
• Confirming Other Technical Signals – Candlestick patterns work best when combined with indicators like moving averages, RSI, and support/resistance levels for higher accuracy.

Common Mistakes Beginners Make with Candlesticks

As a new trader, it can feel exciting to put together a basic strategy and start making money. But don’t rush into it. Beginner traders often misinterpret candlestick charts, leading to poor decision-making. If it was just about spotting a pattern and buying or selling, most traders would be profitable within a week.

Here are three common mistakes to avoid:

1. Misinterpreting Candle Formations

• Beginners often see a pattern and assume an immediate price movement will follow. Markets don’t always move immediately once a pattern forms; patience is key!
• Patterns need confirmation—a single candle is rarely enough to predict the next move reliably. By rushing into every pattern, traders open themselves up to overtrading, especially when market conditions don’t justify a move.
• Example: A hammer candle is bullish only in certain contexts – sometimes, it’s better to wait until the next candle confirms the move.

2. Ignoring the Context of the Overall Trend

• A bullish pattern in a strong downtrend may not be as reliable. Strong trends often prevail for a long time.
• Always analyze the bigger picture—look at recent price action and market structure before making a trade.

3. Relying Only on Candlestick Charts Without Other Indicators

• Candlestick patterns should be used alongside other technical indicators.
• Volume, trend strength, and key support/resistance levels help validate patterns.
• A pattern without confirmation signals increases the risk of false breakouts.

By avoiding these mistakes, traders can use candlestick charts more effectively and make better-informed trading decisions.

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Conclusion

The best way to get comfortable with candlestick charts is through hands-on practice. Spend time analyzing historical charts and observing how different candle formations correspond to price movements. Many free charting platforms allow you to review past data and test your understanding.

If you’re just starting out and feel overwhelmed, join us on Discord and we will help you further.

Next Steps & Further Learning

To deepen your knowledge, explore these topics next:

• A Beginner’s Guide to Common Candlestick Patterns (coming soon!)
• How to Use Candlestick Patterns with Technical Indicators
• Understanding Market Trends and Candlestick Formations

Building a solid foundation in candlestick chart reading was one of the first things I did when learning technical analysis. This understanding has completely transformed my trading, and so I highly recommend it to each of my students.

Once you are familiar with the fundamentals of candlestick charts, try identifying specific chart patterns. Over time, you will start noticing certain patterns quicker, and use them to continually improve your trading decisions.

Stay patient, keep practicing, and don’t forget about market context!