Understanding Chart Types and Candlestick Charts
Before you start looking for patterns, it pays to understand what a single candle actually shows.
7 min read
A chart is nothing more than a market's price history translated into a picture. How that story gets told depends on the chart type. A line chart keeps it brief, while a bar or candlestick chart tells it in far more detail. Once you understand the differences, you suddenly read the same market more precisely and see why experienced traders almost always reach for the candlestick chart.
This guide explains the three common chart types and then takes the candle apart: what it is made of, which four prices it shows, and what its shape hints at about the balance of power between buyers and sellers. This is explicitly about the fundamentals, not a trading strategy. By the end, you should be able to look at a candle calmly and read it.
The three chart types compared
Every chart type shows the same price movement, just with different amounts of detail. The difference lies in how much information is made visible per time period. A time period here is whatever you set as the time frame at the top of the chart, for example one hour or one day. On a daily setting, each dot, bar or candle stands for exactly one trading day.
The line chart is the simplest variant. It connects only the closing prices of the individual periods into a continuous line. The closing price is the price at which a period ends. This produces a very tidy picture that shows the broad direction well, but hides everything that happened within the period.
The bar chart shows more per period: a vertical line for the entire price range, a small tick on the left for the open and one on the right for the close. With that, you see four prices at a glance. The candlestick chart shows exactly the same four prices, but presents them as a body with thin lines. It is precisely this shape that makes it easier to read at a glance, which is why it is the standard for most traders.
- Line chart: only closing prices as a line, very calm, good for the broad direction, but little detail.
- Bar chart: shows open, high, low and close as ticks, plenty of information, but a little harder to read.
- Candlestick chart: the same four prices as the bar chart, but far quicker to grasp thanks to the body and color.
How a candle is built
A single candle sums up four prices from a time period: open, high, low and close. The open is the first price of the period, the close the last. The high is the highest and the low the lowest price reached within that time window. The shape of the candle emerges from these four values.
The wide part is called the body. It sits between the open and the close and therefore shows how far the price moved from the start to the end of the period. The thin lines above and below the body are called the upper wick and the lower wick, together often referred to as shadows. They reach up to the high and down to the low and show how far the price swung in between before coming back.
The color reveals the direction of the period. If the price closes higher than it opened, the candle is usually green or light and is called bullish. If it closes lower, it is usually red or dark and counts as bearish. The colors are purely a matter of display and can be changed in any software, but the logic behind them always stays the same: the body shows the distance from open to close, the shadows show the extremes.
What a candle reveals about buyers and sellers
A candle is ultimately the visible result of a tug-of-war. Buyers push the price up, sellers push it down. Where the period closes shows which side had the upper hand in the end. If the candle closes near its high, the strength leaned toward the buyers. If it closes near its low, toward the sellers. This is not a signal and not a prediction, but simply a description of what has already happened.
The proportions tell a story too. A long body means one side clearly dominated the period and the price covered a noticeable distance from open to close. A very short body points more toward a balance in which neither side really got through. Long shadows show that the price ran far in one direction but was rejected there before the period ended.
What matters is this: a single candle is always just one piece of the mosaic. It describes a single time period and, on its own, says little about what comes next. Its meaning only emerges in the context of the candles before it and its place in the bigger picture. But the first step is always to be able to read a single candle cleanly.
Common Misconceptions
- ✕Reading the candlestick chart straight away as a prediction, even though it only describes what has already happened.
- ✕Dismissing the line chart as imprecise, when it often shows the broad direction more calmly than an overloaded candlestick chart.
- ✕Overlooking the shadows and only looking at the body, even though the wicks show where the price was rejected.
- ✕Trying to read too much into a single candle instead of viewing it in context with the surrounding candles.
Put It Into Practice with FlowTrader
Anyone learning to read candles benefits most from writing down their own observations. In FlowTrader you can note, for each trade, the market situation you entered in and how the picture looked on the chart. After a few weeks this builds into a collection of your own, where you can look up which situations were still unclear to you. That way, simply reading about candles turns into your own, ordered understanding, one that rests on your actual observations rather than on someone else's claims.
Try FlowTrader for free