Interpreting a Candle

Apurva Sheth
I spoke about basic elements of charting a couple of months back when I started writing to you. There I showed you layout of a basic chart. Along with that I also showed you the three basic type of charts commonly used by technical analysts. These are:-

  1. Line Chart
  2. Bar Chart
  3. Candlestick Chart
Amongst all of them candlestick charts are my favourite charts. Candlestick charts add much more depth and value compared to the other two. They focus not only on the day's range but also on the opening and closing prices.

Today I want to delve into greater detail about candlesticks and ways to interpret them. But before that let's refresh our memories and see a candlestick and its components.

Anatomy of a Candle
Source: Profit Hunter

There are three things that one should focus on while studying the anatomy of a candle.

  1. Nature

    The nature of the candle is determined by its opening and closing levels. If the closing price is above the opening price then it is a bullish candle. If the closing price is below the opening price then it is a bearish candle.

  2. Body

    The hollow or filled portion from opening level to closing level is the real body. In case the candle is bullish the body is generally coloured with green or white. In case the candle is bearish the body is generally coloured with red or black.

  3. Shadows

    The long thin lines above and below the body represent the high and low points respectively. They are generally referred as shadows, wicks or tails. The high is marked by the top of the upper shadow and the low by the bottom of the lower shadow.

The basic purpose of interpreting a candle is to find out who is in control.

The Bulls? Or The Bears?

The nature of the candle gives a preliminary indication of who dominated the session. But that isn't enough. There are other things like size and colour of real body and size of the tails that matter as well.

The best way to understand candlesticks is to draw an analogy of two football teams playing against each other. On one side we have the bulls and on the other side we have the bears. The colour of the candle indicates which team dominated. But to find out the extent of which one dominated the other you have to look for the closing with respect to day's range. For example if the close is nearer to the day's high means that bulls are in a dominating position and closer to making a goal. Similarly, if the close is nearer to the day's low then the bears are in a comfortable position and are closer to striking a goal.

There are many variations of candlesticks. Each one of them is given a different name. Today I will show you some of the most basic and frequently seen candles on the charts. Most of the other patterns are nothing but a combination of these basic candles in one way or the other.

Interpreting a Candle
Source: Profit Hunter

A long day represents a large price move from open to close. There isn't a hard and fast rule that clearly defines a long candle but it is always considered with respect to the most recent price action. So if the candle that you are referring to is larger than most of the recent candles then it qualifies as a long day. A long green candle indicates that the stock opened near the lows and ended near the highs. It suggests that bulls dominated the game. A long red candle indicates that the stock opened near the highs and ended near the lows. It suggests that bears dominated the game.

Exactly opposite to a long day candle is the short day where the day's trading range is very limited compared to the most recent candles. A short green candle indicates that bulls and bears evenly matched but the bulls win as the candle is green. A short red candle indicates that bulls and bears evenly matched but the bears win as the candle is red.

When the shadows are longer than the body itself the candle is referred as a Spinning top. The colour of the body isn't very important here. The formation of this candle indicates indecision amongst bulls and bears.

Spinning tops are indecisive candles but still you can make out who won by simply observing the colour of the candle. This isn't possible in a Doji Candle formation. Here the open and close are so close to each other that the colour of the candle is hardly visible. This is a case of perfect indecision.

So those were the basic candlesticks that you will normally come across on a chart. In my next article we will go one level deeper and see the inner workings of a candle. This will help you interpret candles in an even better way.

Are candlestick charts your favourite? How do you interpret a candle? Share your views in the Club or share your comments here.

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15 Responses to "Interpreting a Candle"
12 Sep, 2020
It's so simplified like ABC I like canldes?????Like 
ramesh gaikwad
22 Aug, 2015
Sir, It is commendable, in simple words you explained Candle stick significance. Regards. Ramesh GaikwadLike 
02 Aug, 2015
kamal jain
23 Jul, 2015
concise,immensly be presiceLike 
18 Jul, 2015
Mr Apurva I read the article with graet interest and it is excellent method for technical analysis.I wait for your next article With lot of Thanks RS YadavLike 
Manohar Nadkar
18 Jul, 2015
Thanks a lot Mr Apurva.Like 
16 Jul, 2015
Thanks Apurva. Very useful learning for a lay man. Looking forward to your next article to understand it deeper. Like 
15 Jul, 2015
Apurva nice explanations. made it simple. thanks Like 
11 Jul, 2015
Nice, brief to the point explanationLike 
11 Jul, 2015
Sir, Thanks a lot for candlestick article. Candle sticks are my favourite pattern , but the problem is there are many kind of candle stick and i cannot remember all the pattern and needs to refer chart for what they indicate.It is difficult for me to refer everytime , can a reference chart be provided so that it can be stuck in the wall or desk for easy reference. Please advice Regards Like 
09 Jul, 2015
It is said that candle chart is easier to understand.However, I require some more exposure to get a firm and accurate idea about it. Further, how to forecast the further movement of the stock is all that matters here. How to get that idea infallibly is my problem and clarification in this respect would be of great help and value for me.Like 
09 Jul, 2015
scandlesticks are very interesting and easy to interpret. each candle has its own meaning by its position, length and colour. Please provide more detail Like (1)
09 Jul, 2015
Your all articles are very lucid & easy to understand ... you are developing the concept steadily .... will wait for your next one. Just for your information, I have started studying EMA & MACD of various stocks after reading your articles. Like (2)
vikram vipat
09 Jul, 2015
Apurv sir, Candle chart is my favourite charts patterns in interpretation is very easy to interpret how market, stock n commodities will behave. And i want your guidance regularly for studies more in technical analysis. I want your official email id n phone no for regular conversation. I read technical analysis book by tata Mcgraw hill. Your's Vikram vipat Like 
batchu v s
08 Jul, 2015
Sir, Thanks a lot for the article on candles. I shall be waiting for your next article. Can you also tread upon relationship among candles and their interpretation. Regards.Like 
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