Market basics

Candles: what OHLC encodes, and what every candle throws away

A candle is a summary, and every summary is a decision about what to discard. Knowing exactly which four numbers survived - and which thousands did not - is most of what reading a chart honestly requires.

About 10 minutes to read. Free, no account.

Four numbers, and nothing else

One candle covers a fixed slice of time. It records the first trade in that slice (open), the highest trade (high), the lowest trade (low) and the last trade (close). That is the whole of OHLC. Thousands of trades can happen inside one candle and only those four prices come out the other side.

The drawing is a direct translation of those four. The thick part, the body, runs from the open to the close. The thin lines, the wicks or shadows, run from the body out to the high and the low. The colour says only whether the close was above the open.

Taking one candle apart

open    100      high    108
low      96      close   101

body        101 - 100  =   1   (green: close above open)
upper wick  108 - 101  =   7
lower wick  100 -  96  =   4
full range  108 -  96  =  12

the body is  1 / 12  =  8.3%  of the range

That candle is green and it is barely a victory. Price travelled at least 7 points up and 4 points down from where it started, and finished one point higher than it opened. The colour of a candle is the least informative thing on it.

A wick is a record of prices that did not hold

The high of 108 is a real trade: somebody paid it. The fact that the candle closed at 101 says that paying 108 did not stick - by the end of the slice, sellers had the last word. A long wick is therefore a record of prices that were reached and rejected inside the same slice of time.

That is a genuinely useful observation and it is routinely over-read. Three honest limits on it:

A wick does not say when inside the candle the extreme happened. The 108 might have been in the first minute of a four-hour candle or the last.
A long wick on a thin book can be a handful of orders, not a crowd changing its mind. The candle looks the same either way, because size is not in OHLC.
A wick on one timeframe is a whole candle on another. Nothing about it is a property of the market; it is a property of where you drew the boundaries.

The path is gone

Two candles with identical OHLC can come from completely different hours. A candle with open 100, high 108, low 96, close 101 might have been a slow grind to 108 followed by a flush to 96 and a recovery - or a drop to 96 in the first two minutes, then a long climb to 108, then a fade. The chart cannot distinguish them and neither can any indicator computed from the chart.

This is why a stop and an entry inside the same candle are ambiguous. If a candle’s low is below your stop and its high is above your target, the candle alone cannot tell you which you hit first. Anybody reasoning about a strategy from candles has to pick an assumption there, and the assumption changes the answer.

What one timeframe hides that another shows

Candles aggregate by simple rules: the open of the first sub-candle, the highest high, the lowest low, the close of the last. Watch what that does to four hours of real movement.

Four 1-hour candles, aggregated into one 4-hour candle

hour 1   open 100   high 103   low  99   close 102
hour 2   open 102   high 104   low 101   close 103
hour 3   open 103   high 105   low  98   close  99
hour 4   open  99   high 101   low  97   close 100

4h open   = first open        = 100
4h high   = max(103,104,105,101) = 105
4h low    = min(99,101,98,97)    =  97
4h close  = last close        = 100

The four-hour candle opens at 100 and closes at 100: a doji, a perfect picture of nothing happening. The hourly chart shows a two-hour advance to 105 and a reversal that gave all of it back and more. Both charts are correct. One of them is answering a question you did not ask.

There is a second trap in the same arithmetic: where the boundaries fall is an arbitrary choice. A 4-hour candle starting at 00:00 and one starting at 02:00 cut the same tape in different places and produce different bodies, different wicks and different patterns. Crypto has no session close, so even "daily" means whichever midnight your exchange or chart uses.

The candle you are looking at is probably not finished

A candle in progress has an open, a high-so-far, a low-so-far and a close that does not exist yet - the last trade is standing in for it. So the shape can change completely before the slice ends. A bullish engulfing candle can become a doji in the final minute.

Anything computed from closes inherits this. The moving average, RSI and MACD values you see mid-candle are provisional, which is the same point made in the moving averages lesson from the other direction.

What a candle cannot tell you

How much traded. Volume is a separate series. Two identical candles can carry completely different participation.
The order of events. High before low, or low before high, is not recorded.
Where the book was. A candle is made of trades that happened. It says nothing about the resting orders that were sitting there and did not get hit.
Whether the extreme was tradeable. A spike that printed for two seconds on a thin book is drawn exactly like a level price spent an hour at.
Anything about another venue. The candle belongs to one exchange’s tape, unless the chart is explicitly an index.

The practical habit that comes out of all this: when a candle looks meaningful, drop one timeframe down and look at what it was made of. Either the story survives the detail or it was a shape.

The terms, defined

OHLC: Open, high, low, close - the four prices one candle keeps out of every trade in its slice of time.
Body: The thick part of a candle, drawn between the open and the close. Its colour says only which of the two was higher.
Wick: The thin line from the body out to the high or the low. A record of a price that was reached and did not hold by the end of the candle.
Range: High minus low. How far price travelled between its extremes, which is often much more than the body.
Doji: A candle whose open and close are nearly equal, so the body is almost invisible. It can contain an enormous amount of movement.
Timeframe: The length of time one candle covers. A choice about how much detail to discard, not a property of the market.
Unclosed candle: The candle currently forming. Its close is provisional, so anything computed from it is provisional too.

What this means in practice

Read the range before the colour. A green candle with a huge upper wick is not a strong candle.
Measure the body as a fraction of the range. That single ratio says whether the slice was decisive or indecisive.
When a candle matters to you, drop a timeframe and look inside it.
Never assume which of the high and the low came first - the candle does not say.
Know whether your chart’s candle boundaries are the same ones your data or your rule uses. Shifted boundaries make different candles out of the same trades.
Treat the current candle as unfinished until it is, including every indicator drawn from it.

Nothing in this lesson is financial advice or an instruction to trade. See the risk disclaimer. We never recommend a leverage setting - that decision is yours.