7.2 Introduction to Candlesticks

Candlestick construction sits in Classical Techniques (33% of CMT Level I). The prior chart-types unit showed that a candle is another drawing of open, high, low, and close. This OpenExamPrep section is independent teaching on where that drawing came from, how the four data points become four visual parts, how standard coloring is assigned, and what a single candle can say about strength, volatility, and indecision. Named reversal combinations belong in the next section. Do not turn this unit into a pattern catalog.

From Dojima rice ledgers to a modern quote screen

Candlestick charting is not a 1990s software skin. It grew from Japanese rice-market practice in the 18th century. The Dojima Rice Exchange in Osaka was the institutional home of organized rice trading and of rice-ticket (futures-like) dealing. Market lore associates the visual language of the session — open, high, low, and close drawn as a body and shadows — with Munehisa Homma (also spelled Honma), a rice trader from Sakata whose rules stressed the balance of demand and supply and the mood of the crowd, not only the last print.

Whether every later rule can be footnoted to Homma is a historian's fight. Level I needs the lineage: Edo-period Japan, Dojima, Homma / Sakata, then a late-20th-century migration into Western technical work. Steve Nison's English-language books in the early 1990s are the usual bridge that put candlesticks on U.S. equity and futures screens. After that, every retail platform shipped a candle chart next to the Western bar.

What crossed the ocean was a construction and a sentiment language. A candle does not invent new prices. It re-encodes OHLC so the eye sees who won the session (close versus open) and how far the fight traveled (high versus low) without hunting for left and right ticks.

Western bar charts were already doing OHLC. The Japanese contribution that Level I cares about is the real body as a first-class object and the habit of reading body size, wick size, and location as a session narrative. Modern platforms then added color. Color is a convention layered on that narrative.

Four data points, four parts

The four data points are the same as on a bar:

1. Open — first official print (or published open) of the interval.
2. High — highest traded price.
3. Low — lowest traded price.
4. Close — last print or settlement.

Those four numbers are data. The four parts are drawing instructions:

If the high equals the greater of open and close, there is no upper wick. If the low equals the lesser of open and close, there is no lower wick. If open equals close, the body collapses to a line — the construction seed of a doji, named as a pattern in the next section.

Worked construction: open 62.10, high 64.80, low 61.40, close 64.20.

• Body runs 62.10 to 64.20 (height 2.10). Close is above open, so this is an up candle under standard coloring.
• Lower wick is 62.10 − 61.40 = 0.70.
• Upper wick is 64.80 − 64.20 = 0.60.
• Range is 64.80 − 61.40 = 3.40. Check: 2.10 + 0.70 + 0.60 = 3.40.

A Western bar of the same session has a shaft 61.40–64.80, a left tick at 62.10, and a right tick at 64.20. Same data. The candle simply paints the open-close interval as a block so you do not have to compare two ticks.

Exam trap: calling volume a fifth part of the candle. Volume is usually a separate histogram. The candle's parts are body and wicks (and the implied range). Another trap: saying the body runs from high to low. That would erase the wicks.

Standard coloring

Color is a legend, not a new price. The standard teaching convention:

• Close above open: bullish / up candle. Traditionally a hollow or white body; on modern screens usually green (sometimes blue).
• Close below open: bearish / down candle. Traditionally a filled or black body; on modern screens usually red.
• Close equals open: a doji-style thin body; color is secondary because there is almost no body to fill.

Hollow versus filled is the older paper convention. Green versus red is the later screen convention. Some platforms invert colors or let the user swap them. Some plot white and black regardless of a prior close. Level I's standard coloring is this session's close versus this session's open, not close versus yesterday's close.

That last point matters. A candle can be green (close above open) and still be down on the day versus yesterday if it gapped lower and then recovered inside the hole. It can be red and still close higher than yesterday if it gapped up and faded. The body answers intra-interval direction from the open. Comparison to the prior close is a different question (and is how some filled-if-down-day bar color schemes work). Know which legend the stem is using.

Worked coloring: yesterday closed 50. Today opens 51.50, high 52.00, low 50.80, close 51.10. Close (51.10) is below open (51.50), so the body is filled/red, even though 51.10 is above yesterday's 50. The session was a fade from the open after a gap.

How one candle shows strength, volatility, and indecision

Before you memorize combinations, read one glyph.

Strength is mostly the body. A long up body — open near the low, close near the high, small wicks — says buyers controlled the interval from start to finish. A long down body says sellers controlled it. The close finishing near the extreme is the strength clue: the winning side did not give the interval back.

Volatility is the range (high minus low), not the color. A wide candle, even with a modest body, says the auction traveled. Two narrow candles of opposite color can be a quiet tape, not a war. Compare today's range to recent ranges. A long body in a 0.3-point name is a different event than a 0.3-point body in a 12-point-range stock.

Indecision is a small body relative to the range, especially when both wicks are material. Price went somewhere and came back. Neither side held the extreme into the close. A session that opens and closes at the same price after tagging a high and a low is the extreme of that story (the doji construction). A small body after a long trend, sitting at a swing, is more interesting than a small body in the middle of a rectangle — but that where sentence is already walking toward the next section. Here, just see the indecision shape.

In practice

You flip from a close-only line to candles on the same daily file. A week that looked like a smooth drift up is now four modest green bodies and one wide red candle with a long upper wick. The line hid who lost the open-to-close fight on Friday and how far the high ran. That is the point of the construction: strength (Friday's sellers won the body), volatility (Friday's range dwarfed Monday through Thursday), and a hint of indecision or rejection at the high (the upper wick). You still have not named a shooting star. You have read one session.

Construction limits

A candle cannot tell you the path inside the interval. An up candle that sold off to the low first and then recovered prints the same body and wicks as one that rallied first and then held. For path you need a lower interval or a tick chart.

A candle also does not include volume in its four parts. Overlay volume before you promote a long body to conviction. A wide green body on a dead holiday tape is a large range, not proof of sponsorship.

This section stops at construction, coloring, and single-candle sentiment. The next section names combinations — doji, hammer, engulfing, stars — and insists on trend location and confirmation. Independent CMT Level I practice by OpenExamPrep is at /practice/cmt.