Learn the stock market › Candlesticks and patterns › Lesson 1 of 6
How to read candlestick charts
What the open, high, low and close are, and how they are drawn as a body and two wicks, is covered in Line, bar or candlestick chart?. This lesson is about reading them.
Alphabet, the last 20 days
The body and wicks as shares of the day
A $2 candle can be big for a cheap stock and tiny for an expensive one. What you can compare between days and companies are the proportions: how much of the day's range, from low to high, the body and each wick take up. Together they always make 100%. The last five days of Alphabet:
| Day | Body | Upper wick | Lower wick |
|---|---|---|---|
| Nov 2, red | 42% | 55% | 2% |
| Nov 3, red | 5% | 31% | 64% |
| Nov 4, green | 41% | 58% | 1% |
| Nov 5, red | 62% | 9% | 30% |
| Nov 6, red | 2% | 95% | 3% |
A long body with short wicks. The price moved one way for most of the day, and the close was near the day's high or low.
A short body with long wicks. The price went both ways but closed near where it opened.
A long lower wick. The price was far down during the day but was bought back up. A long upper wick is the reverse: the price was far up but fell back before the close.
What does an ordinary day look like?
To know what is unusual you need to know what is usual. We read 81,294 trading days of the 20 largest US companies since 2010.
| What | Share |
|---|---|
| Green days | 51.1% |
| Red days | 48.5% |
| Body at most a tenth of the day's range (doji) | 10.2% |
| Middle body, as a share of the day's range | 45.8% |
| Rose the next day, after a green day | 51.5% |
| Rose the next day, after a red day | 53.4% |
| Rose the next day, all days | 52.5% |
Green and red days are about equally common. The middle body takes up 45.8% of the day's range, and 10.2% of days have a body so small they are called a doji. A shape that turns up that often can't say much on its own.
The color says almost nothing about the next day. After a green day the stock rose the following day 51.5% of the time, after a red day 53.4%, and after any day 52.5%.
Read several days in a row
One candlestick is one day. What people call patterns are either one to three candles in a row, as in the next lesson, or a shape the closing prices make over several weeks, such as head and shoulders. Both are read against what the price did before, the trend.
Two things are easy to miss. When today's open is far from yesterday's close, the candle starts some distance from the one before. That jump is called a gap, and it often comes from news that arrived while the market was closed. And the same days can be drawn with one candle per week, which can be green even when most of its days were red.
What a candlestick doesn't show
It doesn't show in what order the day's high and low came, or how many shares traded. That is in the volume. It also says nothing about why the price moved.
Test yourself
A candle has a long lower wick and a small body near the top. What do you know for certain?
More numbers are on the Alphabet stock page.