Chapter 3 · What a candlestick really is
What information does a candle retain, and what does it discard?
- Skills to practice
- Understand markets
- Read first
- Chapter 2 · Price discovery
- 3D simulation
- None
Market scene
Lin is looking at a BTC chart made of small bars, each representing an hour. The newest bar says:
- The hour began at 60,000.
- The highest trade was 60,600 and the lowest was 59,400.
- The hour ended at 60,300.
- A total of 2,400 BTC traded during the hour.
The bar is green, with a thin line above and below. Someone in the group says, “That long lower line means buyers absorbed the decline. It will rise.” Someone else says, “The upper line means sellers stopped the rise. It will fall.”
Lin retrieves the minute-by-minute trades and finds another hour on another day that produces an identical bar: the same four prices and volume.
Yet the two hours tell opposite stories.
In hour A, the price slowly falls to 59,400, then heavy buying takes it to 60,600. A small pullback ends at 60,300.
In hour B, the price first surges to 60,600, then heavy selling takes it to 59,400. A rebound ends at 60,300.
One bar, two opposite stories. What does it actually tell us?
Your decision
You can see only this hourly bar. What will you do next hour?
Observe the result
- One bar can contain opposite stories. A and B have identical prices and total volume. The bar alone cannot show which side prevailed.
- The first two choices are guesses. Each works in one story and fails in the other. Guessing correctly is luck.
- The last two choices seek what compression discarded before trading: sequence and pressure. One changes the time scale; the other examines trade direction.
There is also hour C. Its low is 59,400, but price spends only 2 minutes below 59,600—a brief plunge. A spends 12 minutes around that level, and B spends 10. The same low can mean gradual accumulation or one large order followed by an immediate recovery.
The mechanism
An hour contains sixty minutes of many trades. Every trade has a price, quantity, timestamp, and direction: did a buyer urgently buy, or a seller urgently sell? The bar compresses all of this into five numbers:
- All trades in sixty minutes
- The first trade price
- The highest price
- The lowest price
- The last trade price
- The sum of traded quantities
It retains the starting point, endpoint, two extremes, and total quantity traded.
It discards:
| Lost information | Why it matters |
|---|---|
| Sequence | Falling then rising and rising then falling show opposite pressure |
| Time spent at each price | Spending 12 minutes or 2 minutes near the low implies very different trading intentions |
| Which side initiates | Equal volume can reflect urgent buyers or urgent sellers |
| Where volume concentrates | Most trading may occur during the rise or during the decline |
Changing the time scale produces very different bars from the same trades. A and B are identical hourly, but distinct at fifteen minutes. Coarser time scales compress more and discard more.
The bar is a result, not a cause. To explain the movement, return to Chapter 2: who learned what, changed which quote, and traded with whom?
What it is called
This bar is a candlestick. A close above the open usually receives one color, and a close below it another. Software conventions vary: some use green for rises and red for falls; others reverse them. Check first. The body connects open and close; thin wicks connect it to high and low.
The first trade price in the interval.
The highest traded price in the interval. It may be one trade or a level revisited for a long time.
The lowest traded price in the interval. It likewise does not tell you how long price remained there.
The last trade price in the interval. Crypto trades 24 hours a day: “close” means the bar's endpoint, not a market shutdown.
Total quantity traded in the interval. Volume itself has no buying/selling distinction: every trade has both a buyer and seller. You can distinguish who initiated: a buyer taking an ask or a seller hitting a bid.
Real markets
Candlesticks are usually traced to Osaka's Dojima rice market in eighteenth-century Japan, where merchants used them to record daily rice prices. They spread to stocks, futures, and foreign exchange, and are now the default in crypto trading software.
Their construction has barely changed in over two hundred years: they remain a bookkeeping summary of trades in an interval.
Chapter 14 covers this day: a large order drove ETH from over $300 to $0.10 on GDAX, followed by a recovery within seconds. Its daily candle has a lower wick almost reaching zero.
Other exchanges' candles that day lack the wick. A low belongs to a particular venue, and might represent just one trade.
Stocks have closing times; crypto does not. Many exchanges and chart providers divide daily bars at midnight UTC; others use local or exchange time.
Different cuts of the same market and day can produce completely different daily candles. Before discussing somebody's screenshot of “today's candle,” ask which time cut it uses.
Hands-on
Below are minute-by-minute trades for A, B, and C. Display them as candles with different periods.
Candles appear above and volume below. Green marks aggressive buying, orange aggressive selling. The vertical axis runs from 59,300 to 60,700.
Course versionV1-docs; sourcelab:candles；Chapter 3 / TRD-MKT-003
Records parameters and results at the click only; does not mean the experiment passed.View snapshot to save
- Select one hour and switch between A and B. Do the four prices and volume change? What about the buyer/seller initiation ratio below?
- Select 15 minutes and switch again. Describe each hour's sequence in one sentence.
- Select C, then change from one hour to 5 minutes and 1 minute. How does the plunge appear in the hourly candle? How long does price remain near the low?
- Find a recent BTC hourly candle with a long lower wick on any chart. Switch to 5 minutes. Record the minute of the low, how long price stayed nearby, and whether volume increased. Record the timestamp.
Change one variable
A becomes four bars: 60,000 to 59,580; 59,550 to 59,760; 59,800 to 60,360; and 60,400 to 60,300—falling then rising. B becomes 60,000 to 60,440; 60,400 to 59,840; 59,800 to 59,589; and 59,637 to 60,300—rising then falling.
A finer time scale restores the compressed sequence.
A: buying 1,510, selling 890. B: buying 900, selling 1,500.
Both total 2,400, but one is driven by buyers and the other by sellers. Volume says “busy”; direction says “who is more urgent.”
This is C. Its hourly low is still 59,400. At fifteen minutes the plunge is divided between two candles: the first reaches only 59,725, while the next opens at 59,400 and closes at 60,042.
The same low can be a repeatedly contested price region or a fleeting trace of one order.
Three depths
- FoundationWhat information does a candle retain, and what does it discard?Chapter 3
- AdvancedWhat do return distributions look like, and why do fat tails distort pattern statistics?Advanced A · Probability and statistics
- InstitutionalWhy do institutions use volume-weighted prices, books, and individual trades, rather than candles alone?Institutional
Treat candles as summaries, not answers: when a candle interests you, use a finer period to see its path, then examine volume and trade initiation.
Check colors first: rise/fall colors differ across software.
Return distributions: measuring each bar's return reveals extreme moves more frequently than a normal distribution predicts: “fat tails.” Many claims that a shape predicts a rise are unreliable under fat tails; a few extremes can overturn the conclusion.
Test a pattern: define it precisely, align data by timestamp, measure subsequent return distributions, and compare against randomly selected times. See Advanced A · Probability and statistics.
Continue the artifact: Compare distributions, extremes, and information lost in candle compression.
Institutions use finer data: individual trades, order-book snapshots, and volume-weighted average price (VWAP). Execution quality uses benchmarks such as VWAP, rather than candle opening and closing prices.
Data sources create risk: exchanges and vendors may provide different candles. A needle during an extreme move may come from a poorly liquid venue. Research and risk controls must document sources and interval cuts.
Continue the artifact: Compare price-weighted benchmarks and individual execution.
Questions to take away
Chapter self-test
It retains open, high, low, close, and volume. It discards sequence, time at each price, which side initiates, and the price regions where trading concentrates.
Use a finer period, such as 15 minutes, to restore sequence: A falls then rises; B rises then falls. Or examine initiated volume: buyers lead in A, sellers in B.
No. Every trade has a buyer and seller. Volume alone has no direction. Initiation distinguishes buyers taking asks from sellers hitting bids.
Crypto has no closing time. Exchanges and chart providers divide days in different time zones, and highs and lows belong to particular venues. Establish the data source and time cut first.
One idea to take away
A candle compresses market behavior over an interval. It shows what happened, but not why.
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