How to read a candlestick chart: from your first candle to meaningful observation

A red candle gives way to a green one, the next one grows a long shadow — and it is very tempting to see a hint in all this right away. To read a candlestick chart, you first need to understand what it actually shows. A candle tells the story of past price movement. It is up to you to decide which conclusions from that story are worth testing. Let’s start with four numbers, then walk through observing a pattern on the intrade.bar chart.

Four prices inside one candle

A Japanese candlestick combines the data for a chosen period: Open, High (the maximum), Low (the minimum) and Close. In short, OHLC. If the five-minute timeframe is selected, the four values describe exactly those five minutes, not the whole trading day.

Imagine a completed five-minute candle of a currency pair with these notional values:

The price finished the period above the open, even though it dipped below it along the way. But OHLC cannot tell you the order of all the moves: the high or the low may have come first, and the price may have crossed the same level several times. A candle keeps the key boundaries, not a video recording of the market.

Body and shadows: what you see at first glance

The body spans the distance between Open and Close. In our example it is the stretch from 1.0800 to 1.0808. The upper shadow extends to the high of 1.0812, the lower one to the low of 1.0795. If one edge of the body coincides with the corresponding extreme, there is no shadow on that side.

A close above the open forms a bullish candle; a close below it, a bearish one. They are usually colored green and red, but the colors depend on the chart settings. Check the legend first so that you don’t base conclusions on styling. The OHLC numbers themselves do not change with the palette.

A large body means a noticeable difference between the start and end of the period. A long upper shadow shows that the price rose higher but could not hold there by the close. To call a move large, compare it with the neighboring candles: ten pips in a quiet hour and in an active market feel very different.

A candle has no separate field for “what happens next.” So a long green candle does not oblige the next one to be green too. Sometimes it appears at the start of a move, sometimes closer to its end. The answer lies in where the candle sits and in the surrounding part of the chart.

The candle’s timeframe and the trade’s term

The timeframe groups the stream of quotes. By switching a one-minute chart to five minutes, you merge several small candles into larger ones and change the scale of observation. Choppy movement up close may look like a calm, directional stretch from afar.

Expiry belongs to the trade. For example, a one-minute trade opened at 12:00:20 will end at 12:01:20 and span parts of two one-minute candles. The color of either of them does not decide the result of such a trade: you need to compare its own opening and closing prices.

On intrade.bar, in Sprint you choose the duration, while in Classic the end is tied to the close of the five-minute candle. Before a practice entry, read the end time in the form. If you spotted a pattern on the five-minute chart, that does not mean the forecast is meant for the next few seconds.

Doji, hammer and engulfing without the magic

A doji is a candle whose open and close are close together. The body is small, while the shadows can be long. The net change over the period is small, although the price may have moved actively inside it. After a directional stretch it is a reason to look for a slowdown; in a sideways range such candles are often just an ordinary part of the movement.

A hammer has a small body at the top of its range and a long lower shadow. The upper shadow is usually short or absent. It is considered a possible reversal pattern after a decline: the price went down but came back higher by the close. The same shape after a rise means something else. Looking for a hammer by its silhouette alone is a bit like recognizing a person only by their hat.

Engulfing consists of two candles. In the bullish version a bearish candle is followed by a bullish one whose body covers the previous body. In the bearish version it is the reverse. The standard definition refers to the bodies; covering the whole range including the shadows is not required.

All three names describe an observed shape. To turn an observation into a testable hypothesis, add where it appeared, the preceding move and the time frame for evaluation. “Found a hammer” is the start of a description. “After a decline, a completed hammer appeared at the area marked yesterday; I’m checking how the next candles behave” is already a research task.

Why you should wait for the close

The rightmost candle is usually still forming. The current price moves its body and updates its high and low. In a few seconds a neat hammer can turn into a long bearish candle, and an almost complete engulfing pattern can vanish.

When you study a pattern on completed historical candles, evaluate it in live observation at the same moment — after the close. Otherwise the comparison is unfair: in history you have the final shape, and now only an intermediate one. Waiting for the close means fixing the condition, not getting a guarantee of the next move.

Practice on intrade.bar: watching a hammer at a support area

Open the demo mode and choose an available currency pair on the TradingView chart. intrade.bar receives currency pair quotes from FXCM. Start with the five-minute chart and mark an area from which the price has already bounced up within the visible stretch. This is a reference point for observation, not a promise of another bounce.

Wait until, after a decline near this area, a candle completes with a small body at the top and a long lower shadow. Write down why you classed it as a hammer, and save a screenshot separately. If the shape appeared in the middle of a messy range or has not closed yet, skip the practice entry: the chosen condition is not there yet.

For the experiment, set a single horizon in advance, for example ten minutes after the pattern is confirmed, and one notional amount. In Sprint, check the matching term, the “higher” direction and the payout percentage shown. At first you can simply note the expected result without trading; if you open a demo trade, judge it by the recorded entry price, not by the hammer’s low.

After expiry, compare the closing price with the entry price. Separately note whether the decline continued, whether a rise came later or the price stayed in the range. A record like this explains exactly what was tested. The phrase “the hammer worked,” with no time frame or reference point, hides too many different situations.

Collect all cases under the same rules, including the failed and skipped ones. The ten-minute horizon in this exercise is chosen for consistent observation, not as an optimal setting. If you later change the horizon, test the new version separately so that you don’t fit an explanation after the fact.

How to see progress in reading the chart

Progress is the ability to describe a stretch of the chart without guessing: where the period started, where the price went, where it closed and what sets it apart from the neighboring candles. First work through a few OHLC sets, then move on to patterns, and only after that to testing your own rules.

In intrade.bar statistics you can view demo trades separately, along with results by asset and expiry. The reason for an entry and the screenshot are easier to keep in your own notes: built-in numbers won’t explain why you took a particular candle for a pattern. Together, these records help you tell a chart-reading mistake from an unsuccessful but correctly run experiment.

Frequently asked questions about Japanese candlesticks

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