Candlestick Basics and Reading Price Action

Candlestick Basics

Candlesticks describe price action using bodies and wicks (shadows).
Each candle records open, close, high, and low within a chosen time frame.
Candlesticks are useful because they reveal where price opened, where it closed, and the intra-period extremes (highs and lows).
They tell a story about price movement within the defined period.

Timeframes vary (e.g., 1 minute, 2 minutes, 5 minutes, 7 minutes, 8 minutes, etc.).
A candle on a given chart corresponds to the price action over that period. For example, a 5-minute candle represents 5 minutes of price action.
Open and close mark the start and end of the price action during the period:
- Open price is where the candle starts.
- Close price is where the candle ends.
The wicks (shadows) show the intra-period highs and lows:
- The upper wick shows how high price reached within the period before closing.
- The lower wick shows how low price fell within the period before closing.
More formally, for a candle i with open Oi, close Ci, high Hi, and low Li:
- Body height: |Ci - Oi|
- Upper wick length: Wu = Hi - \max(Oi, Ci)
- Lower wick length: Wl = \min(Oi, Ci) - Li
- Candle range: Ri = Hi - L_i
If the candle is bullish (up candle), Ci > Oi; if bearish (down candle), Ci < Oi.
Visual conventions: up candles are often colored green or white, down candles red or black (coloring is not shown here, but the concept remains). The body represents the price movement from open to close within the period.

The body shows the price movement from the open to the close within the period.
A long body indicates a strong move in the direction of the close (up or down).
A wick indicates price action outside the open-close range during the period:
- Long upper wick: price reached higher prices but did not stay there by close.
- Long lower wick: price reached lower prices but closed above them (or vice versa for bearish candles).
If there is a wick all the way up but the candle closes below the wick, this indicates rejection of higher prices within that period.
If there is a long lower wick but the candle closes high, this can indicate buying pressure after testing lower levels.
Example interpretation (described in the video):
- A candle with a wick to the upside but a close bullish within a downtrend may show price testing higher levels early, then continuing down overall; the wick shows rejection of higher prices, but the overall trend can still be downward due to broader structure.

Doji definition (as described): a candle with a small body and relatively long wicks, indicating indecision.
- Typical appearance: small body with long upper and/or lower wick(s).
Dojis are useful for reading price action but should not be traded in isolation.
Doji implications depend on context:
- In a strong trend, a doji may indicate potential weakness in the current move or a turning point if followed by a reversal signal.
- In a range or indecisive market, a doji reinforces uncertainty rather than a clear direction.
The video cautions against trading purely off candlestick patterns; they are one confluence, not a standalone signal.

Candlesticks are most powerful when used with context (trend, structure, and other signals).
Example from the talk:
- A bearish candle with a strong move downward and a subsequent close confirming the move supports a downtrend.
- A candle showing a strong wick rejection but finishing in the direction of the trend may not immediately reverse the structure.
The key is to read multiple aspects together:
- Direction of the body (up vs down)
- Relative sizes of body and wicks
- Where the close sits within the candle's range (near high or near low)
- The broader price action and trend/structure on the chart

Step 1: Identify the timeframe of the candle you are analyzing (e.g., 5-minute, 1-hour).
Step 2: Determine the four prices for the candle:
- Oi, Ci, Hi, Li for candle i.
Step 3: Compute candle components:
- Body: Bi = |Ci - O_i|
- Upper wick: Wu = Hi - \max(Oi, Ci)
- Lower wick: Wl = \min(Oi, Ci) - Li
- Range: Ri = Hi - L_i
Step 4: Determine candle type and implications:
- Bullish if Ci > Oi; bearish if Ci < Oi.
- Note the size of the body relative to the wicks to gauge momentum.
- Note the length of wicks for rejection signals (highs or lows reached during the period).
Step 5: Consider the bigger picture:
- Trend direction and structure (is price making lower highs and lower lows? Is the market breaking structure to the downside or upside?).
- Whether the candle aligns with the prevailing trend or shows a potential reversal/continuation signal.
Step 6: Avoid relying on a single candle; seek confluence with other signals and price action context.

Assignment: Find 10 examples of the candlestick behavior discussed on your own trading chart (the chart you use for SPX, GU, GJ, or any instrument you trade).
For each example:
- Take a screenshot of the candle and label it clearly (open, close, high, low, and timeframe).
- Explain how price ended up reacting after the candle (did price continue in the same direction, reverse, or consolidate?);
- Note the relative size of the body and wicks, and whether the candle is bullish or bearish.
Purpose: Build practical market experience and move beyond purely theoretical patterns.

Candlesticks are a core tool for visualizing price action, widely used in technical analysis.
They provide intuitive information about momentum, momentum shifts, and intraperiod extremes.
In real-world trading, candlesticks are most effective when combined with trend analysis, support/resistance, and other technical signals, rather than used in isolation.
The speaker emphasizes practical learning and experience as essential to becoming proficient, rather than rushing the process.

For candle i:
- Open: O_i
- Close: C_i
- High: H_i
- Low: L_i
- Body height: Bi = |Ci - O_i|
- Upper wick: Wu = Hi - \max(Oi, Ci)
- Lower wick: Wl = \min(Oi, Ci) - Li
- Range: Ri = Hi - L_i
Example:
- Suppose O = 100, C = 105, H = 110, L = 98.
- Then B = |105 - 100| = 5, Wu = 110 - 105 = 5, Wl = 100 - 98 = 2, R = 110 - 98 = 12

Candlestick, body, wick, wick length, open, close, high, low, timeframe, bullish, bearish, doji, confluence, trend, structure