Chapter 3 of 9
Candlesticks and price-action context
Read candle bodies, wicks and gaps without assigning a universal probability to a familiar shape.
In this chapter
Read the four observations first #
For a candle, body size is the absolute difference between open and close; full range is high minus low. Wicks record excursions outside the body. A small body can indicate similar opening and closing prices, but it does not reveal balanced order flow throughout the interval.
A long lower wick means prices traded below the body during the interval and later closed above the low. It does not reveal who bought, how much quantity remains or whether a future advance will follow.
Shapes need context #
The same candle can occur in a trend, near an event, after a gap or in an illiquid market. Its significance cannot be evaluated independently of the timeframe, prior observations and the rule being tested. Named patterns are a vocabulary, not a table of guaranteed forecasts.
A gap between intervals can dominate the apparent candle shape. For a real simulation, use prices that were available for the assumed order and quantity. A bar can include both an imagined profit level and an imagined stop without revealing which happened first.
Test without cherry-picking #
Define numerical conditions such as body-to-range ratio, prior trend length and confirmation timing. Count all matching observations. Compare net outcomes with a reasonable baseline rather than advertising the best chart.
No candle pattern removes event risk or the need to understand position size. In options, a correct observation about the underlying can still coincide with a premium loss because time and implied volatility change.
Decision lab: A candle is compressed path information #
The same candle body and wick can occur with different intrabar paths, spread conditions and news timing. A pattern name does not supply a fill or an independent cause of price movement. Context has to be translated into observable variables.
Write a reproducible candle rule using open/high/low/close relationships. Register trend, volatility and session filters separately. Test the rule with and without those filters on a later sample and retain all versions rather than selecting only a visually persuasive chart.
Hypothetical worked example
A wick describes history, not the next candle
A fictional candle opens at 100, trades as low as 92, reaches 103 and closes at 102. Its body is 2 and its full range is 11. The lower wick is 8.
That record supports the statement that the closing price recovered substantially from the interval’s low. It does not establish the probability of the next interval being positive. The next interval could open at 90 after new information.
A study claiming predictive value must define which candles qualify, when the information becomes available, the assumed execution and the sample of outcomes. Shape alone supplies none of those elements.
Common mistakes
- Calling a named candle a guaranteed reversal.
- Assuming the sequence of high and low from a single bar.
What does a long lower wick directly establish?
Make this chapter useful
Can you defend the reasoning?
Before moving on, answer the self-check in your own words and write why each alternative fails. Use the worked example to test that explanation. Then apply it in the module research task; keep the assumptions and the evidence that could change your answer.
Sources and further reading
- SEBI investor education ↗
- NISM: Research Analyst learning topics (scope reference; independent lessons) ↗
- CME Group: technical analysis of commodity prices ↗
- Bailey et al.: The Probability of Backtest Overfitting ↗
Further-reading references from the curriculum source list. Contract sizes, expiry calendars, settlement references, margin parameters and tax treatment can change; verify the current operative documents for the actual product. Worked figures are illustrative, not current quotes.
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General financial education. No securities recommendation, assured outcome or personal advice. Read the risk disclosures.