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3 min readTapeboard Staff

What is a Candlestick Chart? Definition, Formula, and Example

A candlestick chart is a price chart where each period is drawn as a body spanning the open-to-close range and wicks spanning the high-low extremes, encoding four prices per bar in a single visual unit.

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Candlestick Chart Definition

A candlestick chart is a financial chart in which each time period — one minute, one day, one week — is drawn as a single "candle" encoding four prices: the open, high, low, and close. The rectangular body spans the open-to-close range; thin lines called wicks or shadows extend to the period's high and low. The body is colored green (or white) when the close exceeds the open and red (or black) when the close is below the open. The format originated with 18th-century Japanese rice traders and was introduced to Western markets by Steve Nison in 1989. It is now the default chart type on every trading terminal, including Tapeboard.

How a Candlestick Is Constructed

Each candle requires exactly four data points per period:

  • Open: first traded price of the period.
  • High: highest traded price.
  • Low: lowest traded price.
  • Close: last traded price.

Construction rules:

  • Body top = max(open, close); Body bottom = min(open, close)
  • Upper wick = high − body top; Lower wick = body bottom − low
  • Bullish candle: close > open → green body
  • Bearish candle: close < open → red body

Derived measurements traders use:

  • Body percentage: |close − open| / (high − low) — measures directional conviction. Near 100% is a "marubozu"; near 0% is a doji.
  • Wick ratios: a lower wick exceeding 2× the body at a swing low defines a hammer candlestick; the inverse defines a shooting star.

Worked Example: One Day of Apple

Take a session for AAPL with these prints:

  • Open: $228.10
  • High: $232.45
  • Low: $226.80
  • Close: $231.90

Construction: close > open, so the candle is green. The body runs from $228.10 to $231.90 ($3.80 tall). The upper wick extends $0.55 to the $232.45 high; the lower wick extends $1.30 to the $226.80 low. Total range is $5.65, and the body consumes 67% of it — a strong-conviction bullish bar closing near its high.

Now flip it: if AAPL had opened at $231.90 and closed at $228.10 with the same high and low, the identical four prices would render a red candle with the body at the bottom of the range — a visually opposite signal from the same trading activity. That open-versus-close relationship is what candlesticks surface and line charts hide.

When Traders Use Candlestick Charts

  • Pattern recognition. Multi-candle formations — bullish engulfing, bearish engulfing, morning star, hammer — are defined purely in OHLC terms and only readable on candle charts.
  • Entry timing. Swing traders enter on candle confirmation at support and resistance: a hammer off support with a stop below the wick.
  • Rejection analysis. Long wicks mark liquidity sweeps and failed breakouts; a stop hunt appears as a long wick through an obvious level with a close back inside the range.
  • Multi-timeframe structure. Daily candles define the trend; 5-minute candles time execution within it.

Limitations and Common Misconceptions

  • Candles show four prices, not the path. A candle with a long upper wick doesn't reveal whether the high printed once on 100 shares or traded heavily for an hour. Volume profile and time-and-sales fill that gap.
  • Patterns are not statistically self-sufficient. Bulkowski's encyclopedia tests show most single-candle patterns perform barely better than coin flips without trend, location, and volume context.
  • Gaps distort bodies. U.S. equities gap overnight, so daily open ≠ prior close; intraday charts of 24-hour markets (crypto, forex) produce cleaner candle logic.
  • Color conventions vary. Some platforms use hollow/filled bodies or invert red/green (standard in China and Japan). Always confirm the legend.